[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE STATE
OF THE ECONOMY, PART I
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 15, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-3
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34-673 WASHINGTON : 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee RICK RENZI, Arizona
ALBIO SIRES, New Jersey JIM GERLACH, Pennsylvania
PAUL W. HODES, New Hampshire STEVAN PEARCE, New Mexico
KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas
RON KLEIN, Florida TOM PRICE, Georgia
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
CHARLES WILSON, Ohio PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut ADAM PUTNAM, Florida
JOE DONNELLY, Indiana MARSHA BLACKBURN, Tennessee
ROBERT WEXLER, Florida MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
February 15, 2007............................................ 1
Appendix:
February 15, 2007............................................ 61
WITNESSES
Thursday, February 15, 2007
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 7
APPENDIX
Prepared statements:
Neugebauer, Hon. Randy....................................... 62
Waters, Hon. Maxine.......................................... 64
Bernanke, Hon. Ben S......................................... 71
Additional Material Submitted for the Record
Hon. Ben S. Bernanke:
Board of Governors of the Federal Reserve System, Monetary
Policy Report to the Congress, dated February 14, 2007..... 81
Responses to questions submitted by Hon. Ruben Hinojosa...... 112
Responses to questions submitted by Hon. Albio Sires......... 115
MONETARY POLICY AND THE STATE OF THE ECONOMY, PART I
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Thursday, February 15, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Present: Representatives Frank, Kanjorski, Waters, Maloney,
Gutierrez, Watt, Ackerman, Sherman, Moore of Kansas, Capuano,
Hinojosa, Clay, McCarthy, Miller of North Carolina, Green,
Cleaver, Bean, Moore of Wisconsin, Davis of Tennessee, Sires,
Hodes, Ellison, Klein, Mahoney, Wilson, Perlmutter, Murphy,
Donnelly, Wexler, Marshall; Bachus, Baker, Pryce, Castle,
Royce, Lucas, Paul, Gillmor, Jones, Biggert, Shays, Capito,
Feeney, Hensarling, Garrett, Pearce, McHenry, Campbell,
Bachmann, and Roskam.
The Chairman. Today's hearing of the Committee on Financial
Services will come to order. This is the semi-annual hearing
that we have on the Humphrey-Hawkins Act, with testimony by the
Chairman of the Board of Governors of the Federal Reserve
System, Hon. Ben S. Bernanke. Chairman Bernanke will be
testifying on the state of the economy and discussing the
Federal Reserve's 2007 Monetary Policy Report to the Congress.
Under the procedures, Chairman Bernanke alternates between the
House and the Senate. This is done twice a year--once a year,
the chairman goes to the Senate first, and once a year, he goes
to the House first. Since, in this rotation, he went to the
Senate first, one assumes that there will be no opportunities
to game the stock market today. Those all happened yesterday,
so people can stay through the whole hearing. Reporters won't
have to leave to run to report to the wire services so people
can hysterically overreact to the Chairman's perfectly sensible
statements, which, of course, is the pattern. Although I know
people who are in the market explain that they are not
overreacting themselves--they are, in fact, reacting to other
people's overreaction--the consequences are the same.
I say that because, in the interest of being able to have
rational policy discussions unconstrained by irrelevant
factors, I just would plead with people not to read excessively
into what the Chairman says, and not to read excessively into
what we say. We ought to be able to have rational conversations
about the important topic of today's hearing without the
overreactions. And I would say, since that may not be possible,
as far as I am concerned, people overreact at their own peril.
And I don't think the Chairman or anybody else should be held
accountable because people engage in this form of anticipatory
hysteria.
As to the subject at hand, and under the rules, there will
be four opening statements--by myself, the ranking member of
the full committee, the chairman of the Subcommittee on
Domestic and International Monetary Policy, and the ranking
member of the subcommittee--and the Chairman has very
graciously agreed to stay until 2 p.m. I am deeply appreciative
of this.
This is a very large committee. We will take one 15- to 20-
minute break, and members can gauge appropriately. And we will
be able to accommodate more of the members if we can. Mr.
Chairman, again, I appreciate your willingness to do this.
I will be asking the Chairman about some of the specifics
of his testimony, and of the areas particularly relevant to
monetary policy, but I want to begin with an expression of
disappointment, not in Chairman Bernanke, but in the business
community and many of my conservative colleagues. I believe
that we are at a very sensitive point in the making of economic
policy in this country.
There is, on the part of the business community and many of
its supporters, the view that a full embrace of globalization--
of technological change, essentially of public policies that
allow capital to be fully mobilized and fully mobile, and able
to be employed to its best use--is in the best interests of
society as a whole.
For some time now, until fairly recently, that was the
governing policy in the United States, and in much of the rest
of the world.
That has now come to an end, I believe temporarily, perhaps
for a long temporary period, because increasingly, average
citizens, in America and in other countries, have come to doubt
that the growth that results from this policy of entirely free
capital to move to wherever it finds its best return, people
have come to doubt that this is in their interest. Indeed,
there are a large number of people throughout the world who
believe that they are being hurt by this.
And in consequence, we are at a policy deadlock. I think
people should understand that the chances of an extension of
trade promotion authority going through are quite slender at
this point, unless there is some change in the attitude of many
who are its advocates.
My own view is that if they were, in fact, to come to an
agreement in the Doha Round, that the resulting agreement--if
they reach it as they currently talk about it--wouldn't pass
the House of Representatives. There is resistance, in my view
unfortunately, to the general approach that the President took
on immigration.
In almost all of the important areas in which--and let me
just say, this committee reported out earlier this week on a
voice vote a bill for foreign investment, and there was a
paradox. Because if you talk to the people in the business
community, as the ranking member and I, and the former chairman
of that subcommittee, and others involved in that, if you
talked to them, they were, on the whole, pleased with the
result because it was better than they had expected.
If you read some of the business press, they were concerned
that it was too restrictive. Well, that is an example of where
we are. It is a bill that was more restrictive than some might
have liked on foreign investment, but better than some people
expected reflecting this mood.
So I want to reiterate what I said earlier. Many of us are
prepared to work towards policies that are pro growth, that do
take advantage of what you have when capital is allowed to
reach its best level and find its greatest return, when
technology can be fully taken advantage of, but only if we put
in place public policies that make sure that is more fairly
shared, and in particular, that reverse the tendency which the
Chairman has acknowledged, and I appreciate that, and which the
President has acknowledged, that inequality has been growing.
As I said before, inequality is an essential part of a
capitalist economy--no one is trying to get rid of it, at least
no one sensible. But it can also become excessive to the point
where it is socially harmful and economically beyond what is
needed for the capitalist system.
We are at that point. We are at a point where there is an
excessive amount of inequality in this economy. And it is
growing, and not just in this economy. I recently read an
article which said that in the last set of state elections in
India, every chief minister who was seen as pro foreign was
defeated in terms of the economy. So there is a worldwide
concern. We see in Latin America where an anti-democratic left
is threatening the democratic left in part because of this
economic unhappiness.
I don't see any recognition of that. I regret that. But
people who will continue to resist trying to do something about
healthcare or trying to do something about the right of
employees to join unions, even something as minimalist as the
minimum wage should not be surprised when they run into
absolute resistance to other things which they will argue are
good for the economy.
With that, I call on the ranking member.
Mr. Bachus. Thank you, Mr. Chairman, and I appreciate you
holding this hearing. And Chairman Bernanke, thank you for your
report. As you can see, on this committee, we share the same
concerns, but we have different views on how to address those
concerns and different philosophies. And as you come before us
today, we are interested in your insights regarding not only
monetary policy but also the state of the economy, and as the
chairman specifically mentioned, global competitiveness and
trade and issues of that nature.
Of course, when we talk about differences of philosophy--as
the chairman and I have--on how to approach these issues, how
one perceives the state of the economy greatly depends on one's
point of view.
From my perspective, the economy appears strong and
vibrant, and absent some unforeseen shock, likely to remain so.
When I look at your report and the supporting economic data, I
see vigorous 3.4 percent growth. I see low unemployment of 4.6
percent and inflation of 2.5 percent.
And in a society where opportunity awaits anyone who uses
their talents and efforts to improve the standard of living for
their family--opportunities are there, educational
opportunities, and work opportunities, that is what I see from
your report. I see 7\1/2\ million new jobs created since 2003.
I see a structurally sound economy performing as well as it
did in the 1990's in what we now know is an artificial economic
bubble.
Currently, I see strong 2.2 productivity increases and
record stock market levels not fueled by unrealistic dot.com
speculation, but by globally competitive businesses.
I also see most Americans benefiting from the stock market
growth through individual stock ownership and retirement funds.
In this environment, claiming that record corporate profits
do not benefit most Americans--as some on this committee do--is
not a valid argument.
Others have a different perspective. You have heard the
chairman's perspective. And they see another reality. Some on
this committee believe that the best way to create jobs and
promote economic growth is through aggressive trade
restrictions and barriers.
While I recognize the need to help those economically
displaced or as the chairman says, hurt, by global forces
beyond their control, economic experience does not lead me to
the conclusion that protectionism or isolationism is an
appropriate response.
Some think we need to somehow mandate the elimination of
income disparities. While I share the exasperation of the
chairman over some of the outrageous CEO compensation recently
reported, I believe our corporate governance system works and
that shareholders will correct these abuses without Government
interference. I believe education, not government attempts to
redistribute income, is the proven route to improve wages for
all workers.
Chairman Bernanke, the members of this committee,
Republicans and Democrats alike, respect your experience, your
judgment and your obvious commitment to keeping America's
economy strong and competitive. We all share a goal of doing
that and doing what is best for American workers. We appreciate
you being here and look forward to hearing your comments.
The Chairman. The gentleman from Illinois, the chairman of
the Subcommittee on Domestic and International Monetary Policy
is recognized.
Mr. Gutierrez. Thank you, Mr. Chairman. And thank you,
Chairman Frank. Chairman Bernanke, I think it is safe to say
that you and I have different backgrounds and that we bring
disparate perspectives to the table when dealing with economic
and monetary issues. But after taking over the chairmanship of
the Monetary Policy Subcommittee, I am getting a sense of the
significant and daunting task that you face.
You should rest assured, however, that I will be here over
the next 2 years, along with 443 Members of the House and 100
Members of the other body, to second-guess your every move.
When it comes to economic and monetary policy, we are
entering a very crucial and complex period, especially for the
Federal Reserve and its mandate of maximum employment, stable
prices, and moderate long-term interest rates.
For example, the housing boom has taken a substantial
downturn. Energy prices have climbed and we are facing some
serious issues about our long term energy security. Some
economists warn the threat of inflation is on the horizon. Yet
others appear less worried about inflation than the rising
mortgage delinquencies and foreclosures effecting a wider
economy.
The two major Asian currencies are undervalued, and the
U.S. trade deficit is at record highs, while accusations of
currency manipulations are frequently leveled against both
China and Japan. And perhaps most important of all, we face a
huge Federal deficit at a time when baby boomers are reaching
retirement age and healthcare costs are at an all time high.
While I am anxious to hear from you, Mr. Bernanke, what
concerns me most is retirement insecurity. When it comes to
kitchen table issues, retirement insecurity is the obstacle for
many American families. The U.S. economy is now producing over
$13 trillion a year. But many American families are struggling
just to maintain their living standards and they are up against
stagnating wages, diminishing healthcare, and retirement
benefits that are just disappearing.
More and more families are living paycheck-to-paycheck with
very little in their bank accounts or none at all, and paying
higher interest rates and more fees than they should. And
hanging over their heads is retirement.
I know, Chairman Bernanke, that you have publicly addressed
the related issues of retirement insecurity, the budget
deficit, and the looming retirement of 78 million baby boomers
on several occasions. But from what I have heard and read, you
have approached the problem only in terms of entitlement
reform. Entitlement reform is needed. No question. But this is
not just an issue of entitlement reform. The skyrocketing cost
of healthcare are not just going to disappear if we reduce
entitlement spending. The costs will just be shifted to already
strapped family budgets. Many baby boomers are simply not
financially ready for retirement. If we substantially cut
healthcare, and Social Security spending for the baby boomer
generation, many will face healthcare crises that will drive
them into bankruptcy.
The correlation between rising healthcare expenses and
personal bankruptcy filings is well-documented. And merely
moving these expenses from the public sector to the American
families, in my opinion, is not good for long-term economic
growth. We need more than entitlement reform to give Americans
retirement security. I would like to hear your views on this
today.
Clearly, no single political party and no single body, the
Fed, the Congress, or the Administration, has the answers to
the problems we face. We must work together. And I look forward
to an open frank dialogue with the Federal Reserve, my
subcommittee counterpart, Dr. Paul, and the Treasury Department
on all these issues. And I yield back the balance of my time.
The Chairman. The gentleman from Texas, the ranking member
of the subcommittee.
Dr. Paul. Thank you, Mr. Chairman, and welcome, Chairman
Bernanke. I am very pleased to be here today as the ranking
member. In the midst of a great optimism of monetary policy and
how the economy is doing, I still have some concerns. And of
course, one of my long-term goals has always been to emphasize
maintaining the integrity of the monetary unit, rather than
looking superficially at some of our statistics. But I also
share the concern of the chairman of the committee of our
responsibilities for oversight and your interest as well,
Chairman Bernanke, on having the transparency that I think we
all desire.
Transparency in monetary policy is a goal we should all
support. I have often wondered why Congress has so willingly
given up this prerogative over monetary policy.
Congress, in essence, has ceded total control of the value
of our money to a secretive central bank. Congress created the
Federal Reserve, yet it had no constitutional authority to do
so. We forget that those powers not explicitly granted to the
Congress by the Constitution are inherently denied to the
Congress, and thus, the authority to establish a central bank
was never given.
Of course, Jefferson and Hamilton had that debate early on
and the debate seemingly was settled in 1913. But transparency
and oversight are something else, and they are worth
considering. Congress--although not by law--essentially has
given up all its oversight responsibilities over the Fed.
There are no true audits. Congress knows nothing of the
conversations, the plans, and the action taken in concert with
other central banks. We get less and less information regarding
the money supply each year, especially now that we don't even
have access to M3 statistics.
The role the Fed plays in the President's secretive working
group on financial markets goes essentially unnoticed by
Congress. The Federal Reserve shows no willingness to inform
Congress voluntarily about how often the working group meets,
what action it takes that affects the financial markets, or why
it takes these actions.
But all these actions directed by the Federal Reserve alter
the purchasing power of our money, and that purchasing power is
always reduced. The dollar today is worth only 4 cents compared
to the dollar that the Federal Reserve started with in 1913.
This has significant consequences on our economy and our
political stability. All paper currencies are vulnerable to
collapse and history is replete with examples of great
suffering caused by these collapses, especially to the Nation's
poor and middle class.
This can lead to political turmoil as well. Even before a
currency collapses, the damage done by a fiat system is
significant. Our monetary system insidiously transfers wealth
from the poor and the middle class to the privileged rich.
Wages never keep up with profits on Wall Street and the banks,
thus sowing the seeds of class and discontent.
When economic trouble hits, free markets and free trade are
often blamed, while the harmful effects of a fiat monetary
system are ignored.
We deceive ourselves that all is well with the economy and
ignore the fundamental flaws that are a source of growing
discontent among the various groups. Few understand that our
consumption and apparent wealth is dependent on a current
account deficit running at approximately $800 billion a year.
This deficit shows that much of our prosperity is based on
borrowing rather than a true increase in production. Statistics
show year after year that our productive manufacturing jobs
continue to go overseas. This phenomenon is not seen as a
consequence of the international fiat money system where the
U.S. Government benefits as the issuer of the world reserve
currency.
Government officials consistently claim that inflation is
in check at barely 2 percent, but middle class Americans know
that their purchasing power--especially when it comes to
housing, energy, medical care, and school tuition--is shrinking
much faster than 2 percent per year.
Even if prices are held in check in spite of our monetary
inflation, concentrating on the CPI statistics distracts from
the real issue.
We must address the important consequences of the Fed
manipulation of interest rates. When interest rates are
artificially low, below market rates, insidious malinvestment,
and excessive indebtedness inevitably brings about the economic
downturns that everyone dreads.
We look at GDP figures and reassure ourselves that all is
well. Yet a growing number of Americans still do not enjoy the
high standard of living that monetary inflation brings to the
privileged few. Those who benefit the most are the ones who get
to use the newly created credit first--
The Chairman. The gentleman's time has expired. If the
gentleman will come to a conclusion.
Dr. Paul. I will yield back.
The Chairman. I will now turn to the Chairman. And he is
recognized for his opening statement.
Thank you.
STATEMENT OF HON. BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Chairman Frank, Representative Bachus, and
other members of the committee, I am pleased to present the
Federal Reserve Monetary Policy Report to the Congress. Real
activity in the United States expanded at a solid pace in 2006,
although the pattern of growth was uneven.
After a first quarter rebound from weakness associated with
the effects of the hurricanes that ravaged the Gulf Coast in
the previous summer, output growth moderated somewhat on
average over the remainder of 2006. Real Gross Domestic Product
is currently estimated to have increased at an annual rate of
about 2\3/4\ percent in the second half of the year.
As we anticipated in our July report, the U.S. economy
appears to be making a transition from the rapid rate of
expansion experienced over the preceding several years to a
more sustainable average pace of growth.
The principal source of the ongoing moderation has been a
substantial cooling in the housing market which has led to a
marked slowdown in the pace of residential construction.
However, the weakness in housing market activity and the
slower appreciation of house prices do not seem to have spilled
over to any significant extent to other sectors of the economy.
Consumer spending has continued to expand at a solid rate,
and the demand for labor remains strong. On average, about
165,000 jobs per month have been added to nonfarm payrolls over
the past 6 months. And the unemployment rate, at 4.6 percent in
January, remains low.
Inflation pressures appear to have abated somewhat
following a run-up during the first half of 2006. Overall,
inflation has fallen in large part as a result of declines in
the price of crude oil. Readings on core inflation--that is
inflation excluding the prices of food and energy--have
improved modestly in recent months. Nevertheless, the core
inflation rate remains somewhat elevated.
In the five policy meetings since the July report, the
Federal open market committee, or FOMC, has maintained the
Federal funds rate at 5\1/4\ percent. So far, the incoming data
have supported the view that the current stance of policy is
likely to foster sustainable economic growth and a gradual
ebbing of core inflation.
However, in the statement accompanying last month's policy
decision, the FMOC again indicated that its predominant policy
concern is the risk that inflation will fail to ease as
expected, and that it is prepared to take action to address
inflation risks, if developments warrant.
Let me now discuss the economic outlook in a little more
detail beginning with developments in the real economy and then
turning to inflation. I will conclude with some brief comments
on monetary policy.
Consumer spending continues to be the mainstay of the
current economic expansion. Personal consumption expenditures,
which account for more than two-thirds of aggregate demand,
increased at an annual rate of around 3\1/2\ percent in real
terms during the second half of last year, broadly matching the
brisk pace of the previous 3 years.
Consumer outlays were supported by strong gains in personal
income reflecting both the ongoing increases in payroll
employment and a pickup in the growth of real wages.
Real hourly compensation, as measured by compensation per
hour in the nonfarm business sector deflated by the personal
consumption expenditures price index, rose at an annual rate of
about 3 percent in the latter half of 2006.
The resilience of consumer spending is all the more
striking, given the backdrop of the substantial correction in
the housing market that became increasingly evident during the
spring and summer of last year.
By the middle of 2006, monthly sales of new and existing
homes were about 15 percent lower than a year earlier, when the
previously rapid rate of house price appreciation had slowed
markedly. The fall in housing demand in turn prompted a sharp
slowing in the pace of construction of new homes. Even so, the
backlog of unsold homes rose from about 4\1/2\ months' supply
in 2005 to nearly 7 months' supply by the third quarter of last
year.
Single family housing starts have dropped more than 30
percent since the beginning of last year. And employment growth
in the construction sector has slowed substantially.
Some tentative signs of stabilization have recently
appeared in the housing market. New and existing home sales
have flattened out in recent months. Mortgage applications have
picked up. And some surveys find that homebuyers' sentiment has
improved.
However even if housing demand falls no further, weakness
in residential investment is likely to continue to weigh on
economic growth over the next few quarters as homebuilders seek
to reduce their inventory of unsold homes to more comfortable
levels.
Despite the ongoing adjustments in the housing sector,
overall economic prospects for households remain good.
Household finances appear generally solid. And delinquency
rates on most types of consumer loans and residential mortgages
remain low. The exception is subprime mortgages with variable
interest rates for which delinquency rates have increased
appreciably.
The labor market is expected to stay healthy. And real
incomes should continue to rise, although the pace of
employment gains may be slower than those to which we have
become accustomed in recent years.
In part, slower average job growth may simply reflect a
moderation in economic activity. Also, the impending retirement
of the leading edge of the baby boom generation, and an
apparent leveling out of women's participation in the
workforce, which had risen for several decades, will likely
restrain the growth of the labor force in coming years.
With fewer job seekers entering the labor force, the rate
of job creation associated with the maintenance of stable
conditions in the labor market will decline.
All told, consumer expenditures appear likely to expand
solidly in coming quarters, albeit a little less rapidly than
the growth in personal incomes if, as we expect, households
respond to the slow pace of home equity appreciation by saving
more out of current income.
The business sector remains in excellent financial
condition with strong growth in profits, liquid balance sheets,
and corporate leverage near historical lows. Last year, those
factors helped support continued advances in business capital
expenditures.
Notably, investment in high tech equipment rose 9 percent
in 2006. And spending on nonresidential structures such as
office buildings, factories, and retail space increased rapidly
through much of the year after several years of weakness.
Growth in business spending slowed toward the end of last
year, reflecting mainly a deceleration of spending on business
structures, a drop in outlays in the transportation sector
where spending is notably volatile, and some weakness in
purchases of equipment related to construction and motor
vehicle manufacturing.
Over the coming year, capital spending is poised to expand
at a moderate pace, supported by steady gains in business
output and favorable financial conditions. Inventory levels in
some sectors, most notably in motor vehicle dealers and in some
construction-related manufacturing industries, rose over the
course of last year leading some firms to cut production to
better align inventories with sales. Remaining imbalances may
continue to impose modest restraints on industrial production
during the early part of this year.
Outside the United States, economic activity in our major
trading partners has continued to grow briskly. The strength of
demand abroad helped spur a robust expansion in U.S. real
exports, which grew about 9 percent last year. The pattern of
real U.S. imports was somewhat uneven partly because of
fluctuations in oil imports over the course of the year. On
balance, import growth slowed in 2006 to 3 percent.
Economic growth abroad should further support steady growth
in U.S. exports this year. Despite the improvements in trade
performance, the U.S. current account deficit remains large,
averaging about 6\1/2\ percent of nominal GDP during the first
three quarters of 2006.
Overall, the U.S. economy seems likely to expand at a
moderate pace this year and next with growth strengthening
somewhat as the drag from housing diminishes.
Such an outlook is reflected in the projections that the
members of the Board of Governors and presidents of the Reserve
Banks made around the time of the FOMC meeting late last month.
The central tendency of those forecasts--which are based on
information available at that time and on the assumption of
appropriate monetary policy--is for real GDP to increase about
2\1/2\ to 3 percent in 2007, and about two- or three-quarters
to 3 percent in 2008.
The projection for GDP growth in 2007 is slightly lower
than our projection last July. This difference partly reflects
an expectation of somewhat greater weakness in residential
construction during the first part of this year than we
anticipated last summer.
The civilian unemployment rate is expected to finish both
2007 and 2008 around 4\1/2\ to 4\3/4\ percent.
The risks to this outlook are significant. To the downside,
the ultimate extent of the housing market correction is
difficult to forecast and may prove greater than we anticipate.
Similarly, spillover effects from the developments in the
housing market onto consumer spending and employment and
housing related industries may be more pronounced than
expected.
To the upside, output may expand more quickly than expected
if consumer spending continues to increase at the brisk pace
seen in the second half of 2006.
I turn now to the inflation situation. As I noted earlier,
there are some indications that inflation pressures are
beginning to diminish. The monthly data are noisy, however, and
it will consequently be some time before we can be confident
that underlying inflation is moderating as anticipated.
Recent declines in overall inflation have primarily
reflected lower prices for crude oil, which have fed through to
the prices of gasoline, heating oil and other energy products
used by consumers.
After moving higher in the first half of 2006, core
consumer price inflation has also edged lower recently
reflecting a relatively broad-based deceleration in the prices
of core goods. That deceleration is probably also due, to some
extent, to lower energy prices, which have reduced costs of
production, and thereby lessened one source of pressure on the
prices of final goods and services.
The ebbing of core inflation has likely been promoted as
well by the stability of inflation expectations.
A waning of the temporary factors that boosted inflation in
recent years will probably help foster a continued edging down
of core inflation.
In particular, futures quotes imply that oil prices are
expected to remain well below last year's peak.
If actual prices follow the path currently indicated by
futures prices, inflation pressures would be reduced further as
the benefits of the decline in oil prices from last year's high
levels are passed through to a broader range of core goods and
services.
Nonfuel import prices may also put less pressure on core
inflation particularly if price increases for some other
commodities, such as metals, slow from last year's rapid rates.
But as we have been reminded only too well in recent years, the
prices of oil and other commodities are notoriously difficult
to predict. And they remain a key source of uncertainty in the
inflation outlook.
The contribution from rents and shelter costs should also
fall back following a step up last year. The faster pace of
rent increases last year may have been attributable in part to
the reduced affordability of owner-occupied housing which led
to a greater demand for rental housing. Rents should rise
somewhat less quickly this year and next reflecting recovering
demand for owner-occupied housing as well as increases in the
supply rental units. But the extent and pace that of that
adjustment is not yet clear.
Upward pressure on inflation could materialize if final
demand were to exceed the underlying productive capacity of the
economy for a sustained period. The rate of resource
utilization is high, as can be seen in rates of capacity
utilization above their long term average, and most evidently,
in the tightness of the labor market.
Indeed anecdotal reports suggest that businesses are having
difficulty recruiting well-qualified workers in certain
occupations. Measures of labor compensation--though still
growing at a moderate pace--have shown some signs of
acceleration over the last year, likely, in part, as the result
of tight labor market conditions.
The implications for inflation of faster growth in nominal
labor compensation depend on several factors. Increases in
compensation might be offset by higher labor productivity or
absorbed by a narrowing of firm's profit margins rather than
passed on to consumers in the form of higher prices. In these
circumstances, gains in nominal compensation would translate
into gains in real compensation as well. Underlying
productivity trends appear favorable. And the markup of prices
over unit labor costs is high by historical standards, so such
an outcome is certainly possible.
Moreover, if activity expands over the next year or so at
the moderate pace anticipated by the FOMC, pressures in both
labor and product markets should ease modestly. That said, the
possibility remains that tightness in product markets could
allow firms to pass higher labor costs through to prices,
adding to inflation and effectively nullifying the purchasing
power of at least some portion of the increase in labor
compensation. Thus, the high level of resource utilization
remains an important upside risk to continued progress on
inflation.
Another significant factor influencing medium term trends
in inflation is the public's expectations of inflation. These
expectations have an important bearing on whether transitory
influences on prices, such as those created by changes in
energy costs, become embedded in wage and price decisions, and
so leave a lasting imprint on the rate of inflation.
It is encouraging that inflation expectations appear to
have remained contained. The projections of the members of the
Board of Governors and the presidents of the Federal Reserve
Banks are for inflation to continue to ebb over this year and
next. In particular, the central tendency of those forecasts is
for core inflation--as measured by the price index for personal
consumption expenditures excluding food and energy--to be 2 to
2\1/4\ percent this year and to edge lower to 1\3/4\ to 2
percent next year. But as I noted earlier, the FMOC has
continued to view the risk that inflation will not moderate as
expected as the predominant policy concern.
Monetary policy affects spending and inflation with long
and variable lags. Consequently, policy decisions must be based
on an assessment of medium term economic prospects. At the same
time, because economic forecasting is an uncertain enterprise,
policy makers must be prepared to respond flexibly to
developments in the economy when those developments lead to a
reassessment of the outlook.
The dependence of monetary policy actions on a broad range
of incoming information complicates the public's attempts to
understand and anticipate policy decisions. Clear communication
by the central bank about the economic outlook, the risk to
that outlook, and its monetary policy strategy, can help the
public to understand the rationale behind policy decisions and
to anticipate better the central bank's reaction to new
information. This understanding should, in turn, enhance the
effectiveness of policy and lead to improved economic outcomes.
By reducing uncertainty, central bank transparency may also
help anchor the public's longer term expectations of inflation.
Much experience has shown that well-anchored inflation
expectations help to stabilize inflation and promote maximum
sustainable economic growth.
Good communication by the central bank is also vital for
ensuring appropriate accountability for its policy actions, the
full effects of which can be observed only after a lengthy
period.
A transparent policy process improves accountability by
clarifying how a central bank expects to attain its policy
objectives and by ensuring that policies are conducted in a
manner that can seen to be consistent with achieving those
objectives.
Over the past decade or so, the Federal Reserve has
significantly improved its methods of communication, but
further progress is possible. As you know, the FOMC last year
established a subcommittee to help the full committee evaluate
the next steps in this continuing process. Our discussions are
directed at examining all aspects of our communications and
have been deliberate and thorough. These discussions are
continuing and no decisions have been reached. My colleagues
and I remain firmly committed to an open and transparent
monetary policy process that enhances our ability to achieve
our dual objectives of stable prices and maximum sustainable
employment.
I will keep members of this committee apprised of
developments as our deliberations move forward. I look forward
to continuing to work closely with the members of this
committee and your colleagues in the Senate and the House on
the important issues pertaining to monetary policy and the
other responsibilities with which the Congress has charged the
Federal Reserve. Thank you. I would be happy to take questions.
[The prepared statement of Chairman Bernanke can be found
on page 71 of the appendix.]
The Chairman. Thank you, Mr. Chairman. I have to say that
when you say you would be happy to take questions, you were
somewhat more persuasive than when your predecessor used to say
that.
And I will apologize in advance to the media, because you
have, I think, over the past months in particular, said some
very reasonable things from my standpoint, so I have less to
complain about than they might have hoped, I am sure, in Karl
Rove's eyes, so they should not lose heart.
I particularly want to begin by thanking you for the very
appropriately nuanced discussion of wages. It has troubled me
for some time, and particularly when I read some of the
financial pages, that there is a good news, bad news story. The
good news is that profits are up; the bad news is that wages
are up. And wages are too often written about as if they were
simply a constraint on prosperity.
I particularly appreciate on page 7 of your testimony where
you note that an increase in wages, certainly to the level of
productivity, should not be a problem, and that in general,
there is nothing automatic about a rise in wages leading to
inflation.
It depends on the impact on prices. And in that context, I
especially welcome your noting that not only the underlying
productivity trends appear favorable--and this is in your
discussion of wages and inflation. Underlying productivity
trends appear favorable and the markup of prices over unit
labor costs is high by historical standards.
I hope this is widely noted, your statement that, in fact,
it would not appear to be wage driven pressure to raise prices,
because as you note, the markup of prices over cost in this
regard is high by historical standards.
I would add you did not cover that, it was not in your
topic, that there has also been a reduction in the tax burden.
So we ought to be clear that this simplistic notion that if
wages go up, that is going to cause inflation, is not the case,
and that, in fact, there is, as you say, and I appreciate this,
some reason, some room for legitimate wage increases to be
absorbed without that being inflationary.
Now, there is, however, some bias still in the way we talk
about things. And I did note that there was great relief that
you apparently indicated yesterday that it is unlikely that you
will be presiding over increases in interest rates in the
future. But as I read your report, it seems to me that frankly,
the question ought to be whether or not there are decreases. In
the Monetary Policy Report, on the first page of your--let me
read two statements: ``On balance growth of real Gross Domestic
Product appears likely to run slightly below that of the
economy's potential over the next few quarters, and then to
rise to a pace around that of the long run trend.''
Next paragraph. ``Regarding inflation increases in core
consumer prices are expected to moderate on balance over the
next 2 years.'' In other words, the prediction is, economic
growth below the economy's potential for a while, and then
reaching potential but not going above it.
Similarly, ``inflation is going to moderate an economy
performing somewhat'', not enormously, but ``somewhat below
potential tending towards potential and inflation that is
expected to moderate.'' I suppose that would be an argument for
balance if nothing changes. But I don't see how we get a
concern of inflation as the major concern here.
And as you say, well, but you're still worried more about
inflation and the sense is, stop him before he raises again,
but no likelihood of a drop.
I don't understand why this shouldn't make it at least as
likely as a drop. Again, we have an economy that is running
below potential and we have moderating inflation. Why is that
not at least an equal chance for there to be a reduction in the
time ahead?
Mr. Bernanke. Mr. Chairman, first of all, policy is going
to respond to new information. We are going to be continually
reassessing our outlook and responding appropriately as we see
the economy evolving. Policy also has to respond to risks.
There are risks in both directions. On the real side, I talked
about housing as a downside risk, but there is also some upside
risk.
We have seen very strong consumer spending numbers. We have
seen some strong income growth which suggests that the economy
may be stronger than we think. It is possible. And in a sense,
aggregate spending may exceed our capacity and put pressure on
product markets, and that would be a concern.
The other issue is on inflation. We have had a period where
inflation has been above where we would like to see it as far
as consistency with price stability is concerned.
In order for this expansion to continue in a sustainable
way, inflation needs to be well-controlled. If inflation
becomes higher for some reason, then the Federal Reserve would
have to respond to that by raising interest rates. That would
not contribute to the continued--
The Chairman. I understand that, Mr. Chairman, but you
know, I am a little puzzled--you tell me that your report says
production below potential rising to potential. But then you
say, well, you think it might be more than you think. I mean,
if you think it might be more than you think, why didn't you
think it? It does seem to be a little odd for you to say that
here is what I think, but I also think it might be worse than I
think.
That is literally double-think.
And what particularly concerns me, I read those two
sentences, production now below potential, and prediction only
to get to potential not above it, and inflation moderating, and
I don't see how that computes with, as I noted earlier, the
FOMC has continued to view the risk that inflation will not be
moderated as the predominant policy concern.
I can understand it being a concern. I don't understand
how, given this, it outweighs the other.
And let me say in that regard, and I more or less stick to
time limits, I appreciate your discussion about transparency
on--and your discussing this. And I do want to--let me point--
there he is.
When I came to Congress, in 1981, the open market committee
was, from the standpoint of publicity, the closed market
committee because it did not even announce on the day of the
vote what the vote was. And that gentleman up there, Mr.
Gonzalez of Texas, crusaded, I think, effectively and
appropriately, for some transparency. We have much more.
Here is my concern. When you talk about changing the way
you communicate uncertainty, here is the problem. It is easier
for you to be certain about what you want the interest rate to
be than about what you want employment to be, because you have
more control of one than the other. I admire the desire for
more transparency. I express my concern that procedure and
substance may intermix here and that the argument for greater
certainty can become--and you say we have the two objectives,
stable employment--stable prices and employment.
But one of those might--I appreciate the fact that you have
two children and you love them both. But I am afraid that one
of them might get a little bit more for Hanukkah than the other
if we are not careful. So I do want to ask that we be kept
involved in this process.
But I also want to reiterate from the standpoint of what I
talked about before from the social health of this country--and
I will close. I know there are people saying that the economy
is very good. Let me be partisan for a minute. I say to my
Republican friends, keep telling the American people how good
the economy is, because the disparity between what you tell
them is happening and what they feel themselves makes them even
angrier.
But if inflation is the predominant concern, given your own
statements, it seems to me that you have made an argument that
it ought to be at least balanced; that is troubling to me.
Mr. Bachus. Thank you. Chairman Bernanke, the chairman
mentioned the economy and our different perspectives and our
viewpoints. The chairman and others have said that all these
7.5 million new jobs that have been created are all low-income
workers. They are not higher paying jobs. I notice that the
Bureau of Labor statistics job data that was released just
yesterday indicates that job creation was roughly distributed
across the income spectrum.
Can you tell me why there is a perspective and whether it
is true that this viewpoint that all these new jobs are low
income, when I say that the recovery is benefiting the middle
class and the creating higher paying jobs?
Mr. Bernanke. Well, in terms of the distribution of jobs,
as I mentioned in my testimony, there is an enormous demand for
highly skilled workers and of high-paying jobs. And the
constraints on the highest paying jobs, for example in
manufacturing, is not the demand but the supply. Firms can't
find workers of sufficient qualifications in many different
areas. So there certainly has been job creation at the high
level as well as throughout the distribution of wages.
Mr. Bachus. So the economy is, in fact, creating so many
highly paid, skilled jobs that there simply is not the
workforce to fill those jobs?
Mr. Bernanke. As I have indicated recently, I think one of
the major constraints in our economy and one of the sources of
concern about equality and inequality has to do with
educational differentials. And the more that we can help people
acquire sufficient skills so that they can be eligible for
those high-paying jobs, the better off we are going to be.
Mr. Bachus. Thank you.
The chairman said he was more pleased with you than he has
been in the past. And I am sure that he read the same article I
read in The American Banker, where it was titled that you had
endorsed the GSE housing fund--that the affordable housing fund
that the chairman put forward.
When I saw your testimony I didn't see that in it at all.
But let me ask you this question. There is a philosophical
debate going on in this committee about the creation of these
funds, government control, government mandate, government-
directed funds. There really are two of them. One that has
gotten all the publicity is the affordable housing fund, to
which the GSE's will be required to pay a portion of their
revenue.
And members of this committee, at least Republican members,
we see this as an added cost to low- and middle-income
homeowners. Now, I think across the--I will call this the
divide, across the divide, there is an agreement that the GSE's
could do a better job on their affordable housing mission. But
we are very skeptical that if you take money that is designated
to provide liquidity for people to buy homes, you either
increase the cost of that home, of that home mortgage, or the
availability of that home mortgage, and we think there is a
better way than a government-dictated plan. Clearer maybe than
that is the other proposal that has achieved almost no
publicity, and we had a spirited debate in this committee 2
days ago, is that my Democratic colleagues are endorsing an
insurance company's funding of a community reinvestment fund.
Massachusetts created such a fund in 1998 where insurance
companies are directed to pay a part of their income into a
fund which the, I guess the State of Massachusetts, directs
into affordable housing or community investment projects.
And we debated that because we Republicans felt that when
we pay our premiums to an insurance company, we want that money
to be invested at the highest possible return so that claims
can be paid. We feel like the proper role of an insurance
company is not to take our money, an insured's money, and
invest it in some community's project, we feel that the proper
role for them is to pay claims.
So I just ask you, first of all, would you clarify your
remarks over in the Senate, or is there any clarification
needed, and do you have any unease over the creation of more
government funds of this nature, and the cost on American
homeowners or any of us who pay premiums to insurance
companies?
Mr. Bernanke. Congressman, the story was misreported, and
you misunderstand my position. I did not address the affordable
housing fund, either pro or con. The concern that the Federal
Reserve has had for a long time about GSE's is the potential
for their portfolios to create systemic risk in our financial
system. I should say that we very much support the GSE's
housing mission, and we believe, in particular, that the
securitization function contributes to liquidity in the
mortgage market. Again, our concern is about the portfolios and
their enormous size and the complex derivative exercises that
are needed to maintain the balance of those portfolios.
My comment was one that built on suggestions that Chairman
Greenspan had made in previous testimonies, which was that one
way to limit the growth of the portfolios, but also to achieve
the stated public purpose of the GSE's was, in some way, to
anchor the portfolios in the public purpose, which is
affordable housing.
According to OFHEO, only about 30 percent of the portfolios
are related in any way to affordable housing. So I think what I
would like to see would be the portfolios to be more directly
connected to a public purpose, perhaps holding affordable
housing mortgages or another way, more directly promoting
affordable housing rather than acquiring all different kinds of
assets that are not related to affordable housing.
Mr. Bachus. Thank you.
The Chairman. The gentleman from Pennsylvania.
Mr. Kanjorski. Mr. Chairman, welcome to the committee. It
is fascinating to listen to the discussion, and obviously long-
ranging, but I have a few questions in regard to the emphasis
in the public press over the last several months on executive
salaries and what the appropriate response would be to them.
First of all, I would like your opinion as to how they rate
on that scale of fair or unfair--whether or not they should be
subjected to oversight, and if subjected to oversight, should
they be subjected to some curative action by the Congress? In
particular, we are looking at the U.K.'s shareholders' rights
approach and their ability to give advisory opinions on
executive packages.
If you can summarize, in some way, your views and what the
effect of that would be, positively or negatively on the market
and the economy, it would be most appreciated.
Mr. Bernanke. Thank you. I think it is very important for
shareholders to be aware of compensation packages that CEO's
are receiving. So if they are displeased, they can register
that displeasure through the directors or through selling
stock. So I strongly support disclosure efforts. The Securities
and Exchange Commission recently built on the efforts of the
exchanges, the NYSE, for example, in requiring more extensive
disclosure of compensation packages on details. I think that is
a very important step in the direction of making sure that
shareholders have full information so they can make appropriate
decisions about whether these packages are in the interest of
the company or not.
Mr. Kanjorski. Do you have any opinion as to the United
Kingdom's approach of actually enacting advisory opinions
expressed by shareholders and whether or not that has had any
positive effect on the reduction of some of these packages and/
or other shareholders rights, litigation, and other things that
may have been modified? When you look at the numbers, the U.K.
is significantly lower than the American market. We are
wondering whether that is something that has been reviewed by
the Federal Reserve?
Mr. Bernanke. In general, the CEO salaries are lower in
Europe than the United States, and, to some extent, it is a
puzzle why that is the case. I think there are a lot of reasons
for it. But certainly, one thing we want to be sure we are
doing is ensuring good disclosure and good oversight.
I don't really have an opinion on the advisory council. I
think we should be sure that the compensation decisions are
being made in a disinterested independent way, and that the
directors who are involved in compensation are independent, and
not subject to the influence of the management.
Mr. Kanjorski. Very good. If you rate on a scale of what is
economically fearful in our society today, particularly the
domestic economy, what would be the greatest fear that you
have?
Mr. Bernanke. There is a set of issues that are
interconnected, having to do with savings and deficits and
current account and so on. We are a low-saving society in
general, and we are facing a demographic transition which will
mean that a much larger share of our population is of
retirement age or outside the workforce. That is going to pose
enormous challenges to our fiscal budget. It is also going to
pose enormous challenges to our economy as a whole, because
with fewer workers, we need to have more capital, more savings,
and more preparation for the economy to be able to absorb a
larger number of retired workers. Related to that, of course,
is the increase in medical care costs which also puts pressure
on fiscal policy.
So the fiscal issues in the low savings rates, which also
contribute to the current account deficit, I think are at the
center of the issues we should be concerned about. We really
need to address our savings issues and the implications of the
demographic transition that we are seeing not very far in the
future.
Mr. Kanjorski. What role should Congress or the government
play in that?
Mr. Bernanke. The government needs to address both the
fiscal implications of aging--certainly a part of that is the
cost of medical care, which is a big part of the economic cost
of aging--and also of the fiscal burden. And to the extent that
outside of the fiscal arena we can find ways to encourage
savings more broadly, and asset-building, I think that would be
very constructive.
Mr. Kanjorski. So you see a very positive role for
government to play?
Mr. Bernanke. Good policies would certainly be helpful,
yes.
The Chairman. The Chair wants to announce, in recognizing
members, that the two parties follow different patterns, and
the Chair is accepting the ranking member's suggestions. So you
may notice some disparity. We go by seniority; they go by, I
guess, when members arrive.
I want to explain that part because a recent analysis of
what I am thinking made a great deal of the fact that a certain
witness will be testifying tomorrow, and the witness is the
choice of the gentleman from Texas. So I realize that people
may not be fully aware of what we are doing.
Next on the list is the gentleman from Louisiana.
Mr. Baker. I thank the chairman.
Chairman Bernanke, following up in some measure on the
course relative to problems of significance going forward,
there are undoubtedly negative effects of the inversion in the
workforce, where we have more people retired, and less people
working.
At the same time, though, there has been an offsetting
growth that has been, frankly, surprising to me at the number
of investors in equities over the last 2 decades. I was
particularly struck by the fact, according to the mutual fund
industry, that in households with aggregate annual incomes of
less than $35,000, 31 percent hold mutual fund holdings. What
it triggers for me is an understanding by working families that
for their long-term financial security, they need to be
invested in the markets.
Now, we can debate whether it is index investing, whether
or not actively managed is good or not. The bottom line is, if
you are going to do something beyond your earnings from salary,
investing in overall economic growth is a very sound policy,
particularly for the younger and newer entries into the
workforce.
There are now issues, I believe, in international
competitiveness that are overhangs that cause concern, whether
it be potential for class action litigation, whether it is the
wage--excuse me, the tax rates here as contrasted with those in
Europe, and there seems to be certainly an outflow of
manufacturing-type employment to other countries, leaving us
with a more technology-based economy going forward.
Having said all of that, it seems that with the percentage
of Federal spending in 1956 at--20 percent of Federal spending
was on Social Security and related entitlements; today we see
that crossing over 60 percent. Given your comment and concern
as to the biggest problem facing us, how do we provide for
retirement security for working families?
It seems most Americans have figured that out; they need to
be in the markets. Isn't it time for this Congress to really
seriously consider voluntary, not saying mandated requirement,
but voluntary flexibility and directing your Social Security or
retirement savings into market-invested, market-based
investments? It would seem to me that the sooner we get out or
away from these enormous entitlement obligations with the
inversion in the workforce and the expectations of most people
to retire at age 65, that there isn't a way out of this morass
without allowing people to share in the overall economic
prosperity of this Nation through some sort of equities
investment.
If we don't do that, what is the solution to the retirement
problem we face?
Mr. Bernanke. I think it is very valuable for people to
have the opportunity to own an account, to have some exposure
to investment even if it is in index funds which you point out,
so that people have the pride of knowing that they are
providing for their own retirement. So I think it is a very
good idea to encourage people to begin to build wealth, and to
begin to hold assets.
As you know, the Social Security aspect of this is a very
complex debate. The diverting of funds the way you describe has
some of the benefits of giving people the opportunity to have
control over their own accounts, but it also doesn't really
directly address the long-term imbalance on the fiscal side of
the spending and revenues of the Social Security system.
Another approach, which is related and might work better
without addressing the Social Security concern directly would
be to have add-on accounts where people would have the option
to put in additional moneys that could be invested in--
Mr. Baker. If I may before my time expires, just as a quick
follow-up, the rate of return, though, on the Social Security
investment is currently so low that if you were to divert any
portion of that into an active investment account, the yield
would be so much greater than what you currently earn--and I
know of your concern that current earnings are paying current
retirees' benefits. I believe with the proper managed
investment account over time, you could pay those current
retirees' benefits and still have a yield sufficient left as a
net margin that would beat the current rate of return for a
Social Security recipient. In essence, we can accomplish both
goals with a very carefully managed investment.
Mr. Bernanke. I understand that position has been espoused.
I think just one concern is that the historical outperformance
of equities relative to bonds may reflect to some extent the
higher riskiness of stocks. To some extent it is a risk
premium, and you know--
Mr. Baker. But there has never been a 10-year period when
the market didn't beat Social Security.
The Chairman. It is a very deep issue about why equities
have performed better than bonds. But if you look at stock
markets in czarist Russia, they wouldn't look so good today.
The United States has been very successful. We have had a
growing economy. We have succeeded in escaping the Depression
and World War II and so on. So in that respect our stock market
may not be representative of the world's equities in some
sense.
It is a very difficult question. I would only make the
point that you cannot assume that equities will pay the high
rate of return in the future that they have in the past. There
certainly is some risk to that.
The gentlewoman from California.
Ms. Waters. Thank you very much, Mr. Chairman. I would like
to thank Chairman Bernanke for being here this morning.
It is always good to have you before this committee
discussing the important economic issues of the day. I worked
to prepare a statement last evening, but I have decided not to
read that statement because my staff just gave me this morning,
remarks by Chairman Ben S. Bernanke on the level and
distribution of economic well-being.
I just read it. I am extremely moved by your remarks, and I
do think that you have taken a rather complicated issue and
helped to remove it from simply a discussion of you either have
education or you don't, you either are going to make it, pull
yourself up by your bootstraps, kind of the government has no
responsibility for that.
It is not that simple. And you talk about opportunity and
ensuring a fairness and opportunity, but not guaranteeing any
outcomes, and you talk about the responsibility of the
individual, but in this discussion it was quite expansive.
I watched the closing of a Goodyear plant in Los Angeles
when I first ran for office, and I saw people who had worked at
that plant for 20, or 25 years who paid taxes, sent their kids
to school, and had mortgages, suddenly out of a job, and I
watched men go to the bar across the street from the plant for
the next 5 or 6 years and just drink themselves into oblivion--
not being retrained, unable to get jobs because of their age,
etc. You kind of allude to that.
You also talk about the importance not only of formal
education, K through 12, but also the other opportunities in
our society for job training, the community colleges. You even
allude to and talk a little bit about preschool, and of course,
I am from Head Start. Having taught and worked in Head Start, I
think that is extremely important, building self-esteem and
certain kinds of values at an early age.
But I would like to hear you talk a little bit more about
policy implications. Aside from that which you alluded to, you
know, education through job training, etc., do you think there
is room for perhaps tax incentives to corporations and
businesses that do on-the-job training to make sure that people
are trained for real jobs that are sustainable?
I would like to hear a little bit more about what you think
we could do with public policy to close this growing income and
wage gap. You discussed the superstars and CEO's and
globalization and trade and all of that, and the bottom line
is, there is this growing wage and income gap. What other
policy possibilities can you share with us for helping to close
this gap?
Mr. Bernanke. Thank you for taking the time to read my
speech. I know it wasn't a short set of remarks.
The broad point I am trying to make in those remarks is
that I believe that technology and trade, which are
tremendously important forces for American economic growth,
unfortunately have the side effect that they sometimes cause
dislocations, like the one you were just describing, and I
think it is very important that we not respond to those
dislocations by saying, ``Well, we are going to stop trade, we
are going to stop technological improvement.'' That is really
doing more harm than good, I think.
So then the logical consequence is, if we want to protect
people and help them deal with these dislocations, and we don't
want to stop the processes that generate growth in our economy,
we have to find other ways to help people adjust and adapt. And
I talked about a number of general approaches in my remarks.
I do sincerely believe that what you know and what you can
do is critical, that training--not just K-12 education, but all
kinds of training--community colleges, junior colleges, online
courses, training on the job--all those things are critical to
getting people the skills they need so they will be in demand
and be able to find good work when changes in the global
economy mean that their Goodyear plant has shut down.
I also indicated in my remarks that we could perhaps reduce
some of the anxiety about job loss if we didn't tie all
benefits so directly to employment. So, for example, I think it
is an issue that healthcare is so directly tied to employment.
Ms. Waters. Portability of healthcare?
Mr. Bernanke. Portability of health insurance would be, I
think, a positive development. It would reduce the anxiety that
people face when they worry about their jobs, and indeed, some
of the anxiety which I hear a great deal about may be less what
has actually happened than what people fear may happen. It is
the insecurity rather than the actual outcome so far that
people are worried about. So I think there are, you know, a
number of general things we should try to do.
Now, one thing I also said in my remarks is that solving
this problem is very, very difficult. How exactly we can make
sure that training programs work effectively instead of just
wasting money is very difficult. Finding the best way to make
health insurance portable; there are lots of ways to approach
it, but it is difficult.
So I turn it back to you, unfortunately. I think the
Congress is going to have to think hard about the best ways to
address these things, but they need to think about them.
Ms. Waters. Mr. Chairman, I would like to ask unanimous
consent to submit these remarks for the record.
The Chairman. Without objection.
The gentleman from Texas, Mr. Paul.
Dr. Paul. Thank you, Mr. Chairman.
I would like to pursue the issue of the current account
deficit. It seems like almost all economists express concern,
some worry about it, but I can't find anybody who tells us that
we should totally ignore it. And we do now borrow approximately
$800 billion every year. We have a foreign debt of several
trillions of dollars, and to me it represents an imbalance
which is the consequence of the monetary system and presents a
potential problem for us. Likewise, I see that potential
problem in the number of derivatives out there. There is one
figure that says there are $236 trillion of derivatives, and it
seems like very few people understand exactly what that means,
and it certainly is so huge and diverse. I don't even think the
Congress that we have that is always anxious to regulate
everything has offered a scheme for regulating derivatives
because, quite frankly, I don't think they are capable of doing
that.
Foreigners now own 43 percent of our debt, approximately
twice as much as the Fed has been required to borrow. And one
of the questions I have is how much pressure would it put on
you if--I guess in even a theoretical sense, what if they
didn't buy any of our debt, and all of a sudden you had to deal
with that problem? Right now, there is a sign that maybe they
are buying less. We have heard rumors and innuendos in the
media and hints from China that, yes, they are not going to be
buying as much, and yet there hasn't been really a crisis.
There has been no panic, and we know there is self-interest on
their part to maintain the dollar because they hold so many.
But in many ways I think we get a free ride. We get to
export our dollars. We don't have to monetize them here. We get
to export our inflation, but it potentially has a problem for
us if all of a sudden they buy less, and these dollars come
home or these dollars go into goods and services.
Also the other concern that I have that I would like you to
address is the subject of the revaluation of the yuan. I
understand you and Secretary Paulson went over to China to put
pressure--at least the media presented it that way--put
pressure on them to increase the value of the yuan and decrease
the value of the dollar in relationship, which in reality, it
seems to me, would put pressure on our interest rates and push
our interest rates up and raise our prices. And some people
have reported that couldn't possibly be our policy where we
would deliberately want to do that. And then again, it would
put more pressure on--I know it is an artificial arrangement
right now.
But in some ways what the Chinese have done is they have
revived the old Bretton Woods standard of fixing their currency
to our dollar, and some people look longingly to the Bretton
Woods days where we worked with fixed exchange rates. Of
course, there were different conditions then.
But if you would, if you would address both what our
position is with the Chinese yuan as well as what happens if
they significantly--if the foreigners, especially Japan and
China, start to buy a lot fewer dollars and how that would
affect your policy.
Mr. Bernanke. Thank you. You are correct that we are to
some extent dependent on capital inflows to support the trade
and current account deficits we currently have. The current
demand for U.S. assets from abroad both from public and private
sources remains strong, so there doesn't seem to be any
immediate concern that will not continue. However, there is a
risk sometime in the future that there would be less demand for
dollar assets, and that could cause some movements in currency
and bond markets that might be disruptive. And for that reason
I have advocated, as many others in Congress have, that we have
tried gradually to move our current account deficit down to a
more sustainable level.
The way to do that essentially, it is a very complex
subject, but essentially the current account deficit arises
because of asymmetries in the saving investment balance here
and abroad. In the United States we have a decent rate of
investment, including construction of new homes, but relatively
low saving rates, and that difference we have to borrow abroad,
whereas in many other countries in East Asia, and among oil
producers and the like, they have an excess of saving over
investment, and they are lending us that difference, and that
is why the capital flows are moving from abroad to the United
States.
The way to adjust that, over time, is to create a better
balance of savings and investment both in the United States,
which would be through primarily greater saving, but also
abroad by creating more reliance on domestic demand for growth.
So, for example, in China there is a long-term plan, which we
support, to try to reduce the reliance of the economy on
exports and increase its reliance on domestic consumption,
thereby reducing their savings rate to a more appropriate
level, which also increases the living standard of their
people. So I think with that process we can move gradually
toward a greater balance.
With respect to the yuan, I think there are several reasons
to move towards greater flexibility in the yuan, and I
described them in a speech I gave in China. First, China is a
very large country, and it should at some point have an
independent monetary policy of its own rather than being tied
to the United States. In order to do that, they have to have a
flexible currency.
Secondly, the flexibility of the yuan is needed to
accomplish this rebalancing from export orientation to domestic
demand that I was referring to earlier.
And thirdly, yuan appreciation and flexibility makes some
contribution to helping us to rebalance the current account
deficit we currently have, although I think the larger force
quantitively would be the rebalancing of demand from exports
towards domestic demand in China.
The Chairman. The gentlewoman from New York.
Mrs. Maloney. Thank you, Mr. Chairman.
And welcome back, Chairman Bernanke. Many of my colleagues
have been quoting ``American Banker.'' I would like to show you
``The Hill.'' There you are on the cover. It says your
testimony sparked a stock price rally, and the Dow is up 87
percent, and there is great optimism for our economy, and I
hope you are right. I hope the stock market is right.
But regrettably, some of my constituents are not feeling
optimistic. They feel that the economic expansion has not ended
up in their take-home pay, and some are very concerned about
losing their homes, and I share that concern. They are
concerned about the rising rate of mortgage defaults and home
foreclosures. In my district employment is high and stable, yet
I am being told that foreclosures are at rates that are up by
an order of magnitude--they have jumped up dramatically from
what they were last year. Some of my colleagues tell me that
they are experiencing the same thing in their districts around
the country, and they are being told that homeowners are losing
their homes in very stable neighborhoods, and some say that
this is due to various causes such as unemployment. Yet in my
district and others where employment is high, and in some other
areas, it is due to the decline in the housing market.
But many also ask whether certain mortgage products,
particularly in the subprime market, have contributed to this
foreclosure crisis or challenge. In particular, many point to
the so-called 2/28 ARM's, and some have described them--and I
quote--as an inherent predatory product. And as you have told
me and others, these 2/28 ARM's are 80 percent of the subprime
market.
Recently the Fed wrote back to Senator Dodd, taking the
position that in its recent guidance on nontraditional
mortgages, they did not extend to 2/28 for similar projects.
And since these are what many people think is the problem, my
question is why is the Fed not addressing the 2/28's and
issuing guidance for what many people feel is the main problem
in the foreclosure rates and the loss of homes of many people?
You eloquently have said many times that homeownership
leads to participation in our economy and increased wealth for
Americans, yet if you are losing your home, it is leading you
to a personal crisis, and if it continues, we will be facing a
tremendous crisis in our economy and in our districts. And now
for your comments on whether or not the Fed plans to extend
guidance to the 2/28 subprime project, products.
Mr. Bernanke. You are correct, Congresswoman. There has
been a surge in delinquencies and foreclosures, particularly--
as I mentioned in my testimony--in subprime lending with
variable rates, rates that adjust with short-term interest
rates, and that is a concern to us. We certainly have been
following it carefully. It is obviously very bad for those who
borrow under those circumstances, and it is not good for the
lenders either, who are taking losses.
We have tried, together with the other banking agencies, to
address some of these concerns. We recently issued a guidance
on nontraditional mortgages, which had three major themes. The
first was that lenders should underwrite properly, that is,
they should make sure that borrowers had the financial capacity
to pay even when rates go up, and not simply underwrite based
on the initial rate but also deal with the possible payment
shock. Secondly, that lenders should give full disclosure and
make sure that people understand the terms of the mortgages
they are getting into. And I would add that the Federal Reserve
provides a number of documents, booklets, and descriptions that
are required to be included along with mortgage applications
for adjustable rate mortgages. And thirdly, and this is more on
the issue of the lenders rather than the borrowers, that
lenders should make sure they appropriately risk manage these
exotic mortgages, which we don't have much experience with, so
some caution is needed in managing them, as we are now seeing.
So those, I think, are very good principles, and I think we
would stand by those principles.
Now the question has arisen whether the 2/28's, 3/27's are
covered by this guidance, and I think the answer is yes and no.
The guidance as written refers to specific types of mortgages,
including those that have negative amortization, that is, the
amount owed can actually go up for a period, which is not
usually the case with 2/28's and 3/27's. So in that respect,
those types of mortgages were not, you know, literally included
in that initial guidance.
We, the Federal Reserve, along with the other banking
agencies, are currently preparing a clarification to the
initial guidance which will say that these same principles
apply also to mortgages of this type that have variable rates,
and particularly those that are of a subprime nature. But I
would just say now that I hope that in our guidance, in our
supervision, that we have conveyed to lenders that those three
principles, good underwriting, good disclosure, and good risk
management, are broad, good business principles, and they
should be applying those to all mortgages they make.
Mrs. Maloney. My time is up, but, Mr. Chairman, can I just
ask when will this guidance be up? Because it is very
important. What is the time frame for my constituents?
Mr. Bernanke. Very soon, very soon.
The Chairman. The gentlewoman from Ohio.
Ms. Pryce. Well, thank you, Mr. Chairman.
Welcome, Mr. Bernanke. It is great to have you here. I
would like to actually discuss for a moment the cost of
healthcare in this country, it is definitely one of the major
concerns when I talk to business and industry in my district.
It certainly drives up the cost of doing business in our
country. Certainly not the only thing, regulation, litigation
and other factors, but it is more important because it affects
families everywhere.
The greatest problem is that people just can't find health
insurance that they can afford; therefore, they don't get the
medical treatment that they need. And it occured to me, and
many others that one of the reasons for this is because there
is really no consumer factor in healthcare in this country. We
don't shop for our benefits. We take what our insurance
companies provide for us.
Market forces seem to work very well in all other aspects
of our society. Is this what is wrong with our healthcare
delivery system, this lack of market force, so to speak? And as
I am sure you are aware, the President has proposed a very
ambitious healthcare plan designed to provide enhanced tax
benefits to individual purchasers, and I assume that is so that
more people will purchase insurance, more people will shop for
insurance, and therefore they will pay more attention to their
healthcare needs, and it would bring healthcare more in line
with how we make other purchases in this country.
I just would like to know if you think that would be a good
way to go, how it might affect international competitiveness,
and then, of course, your thoughts on portability. I assume you
made mention in response to Mrs. Maloney, or I guess it was Ms.
Waters, that pensions and healthcare should be portable, and if
you have time on my time, would you further your response?
Thank you.
Mr. Bernanke. Congresswoman, you are correct in pointing
out a very serious, serious problem, and I think you are also
correct that one of the main reasons why healthcare is so
expensive in the United States has to do with the fact that we
are always buying it with somebody else's money and not with
our own money. We have a system where technology is advancing
rapidly, where our ability to do new and sophisticated tests,
and provide new and sophisticated drugs, and new procedures is
advancing rapidly. In most industries, new technologies save
costs, but not in medicine because of third-party payment, and
the doctor and the patient are not making a cost-based
decision. The cost efficiency is not perhaps what it should be.
Now, one approach to this is to increase market forces in
the determination of what test to order and what costs and how
much to shop and so on. There are ways to do that. The health
saving accounts, for example, create a catastrophic coverage,
ask for a catastrophic coverage, and ask people to save money
within this account to buy coverage for medical care below the
catastrophic level. Some people may be uncomfortable with
having to make those kinds of decisions, so an alternative is
to have competition between, say, HSA catastrophic plans and
other types of medical management, HMO's, PPO's, traditional
insurance and the like. By creating more competition, I think
there would be some benefits.
But, again, it is a complex subject. There are a lot of
other things we could do. I think we could increase
transparency in terms of hospitals and doctors letting us know
what they charge, what their quality is, and improving
information technology in healthcare, which I think would
reduce errors and create more consistency across the country.
We currently have very big differences in the cost of managing
a certain kind of condition in different parts of the country.
More uniformity and more best practice would help reduce costs
as well. So I think markets could have a useful role to help
reduce, or at least control, the cost.
Portability is a difficult question. One approach to
portability is to have insurance companies insure workers
rather than insure employers, so to speak. That would require
somehow creating different kinds of pools rather than employer-
based pools. You need pools in order to share risk, and there
are some issues associated with that.
The main alternative would be to give people the ability to
take their policy from their current employer and then move
over to another employer with the same policy. These are all
things we should be looking at, but none of them is a really
simple problem because in each case we want to make sure that
people are buying as part of the pool, a risk pool, rather than
buying on an individual basis where, if they are ill or have a
preexisting condition, they won't be able to afford insurance.
Ms. Pryce. Thank you very much.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman.
Welcome, Chairman Bernanke. I am over here. I happen to
like your predecessor. The problem is I didn't understand a
thing he ever said. So you are a breath of fresh air in the
sense that, whether I agree with you or not, at least you are
speaking in English, and I can understand what you are saying.
And I especially want to thank you for your response to Ms.
Waters' question.
Let me follow up quickly on Mrs. Maloney's question,
because I am not clear, and I hope you can answer this question
just with a yes or a no answer. Does the guidance that the
underwriting--the guidance that you are issuing regarding 2/28
and 3/27 mortgages require that those mortgages be underwritten
to the fully indexed rate just like you do with traditional
mortgages, or does it not?
Mr. Bernanke. This is a joint guidance. We are still
working on it with the other banking agencies. We have not yet
determined that.
Mr. Watt. But the one that you put out previously, did it
require--
Mr. Bernanke. Yes.
Mr. Watt. So if it were the same, it would require--
Mr. Bernanke. Same principle, yes.
Mr. Watt. Okay. The increase in foreclosures is a serious
problem, and one of the concerns we have is that the Fed has
never adopted a final rule under its authority under the truth
and lending act to prohibit practices or acts that it found to
be unfair or deceptive or designed to evade the purposes of
HOPA over the entire class of mortgage loans. There has never
been a real rule on these things, and I think that is one of
the things that is putting pressure on us to be more aggressive
in having a Federal predatory lending standard, or at least a
Federal predatory lending floor.
I am wondering whether you view that as a problem, and
maybe I could just get you to discuss with me why the Fed has
never used that more aggressive, unfair, deceptive trade
practices language to be more aggressive in this area in
light--and especially in light of the increasing number of
foreclosure that we are experiencing.
Mr. Bernanke. Congressman, we have found that it is very
difficult to write rules in advance that strike out entire
practices under all circumstances. We find it is more effective
to be flexible and work on a case-by-case basis. It is one of
these things like, ``You know it when you see it.''
And so what we have done rather than write specific rules,
is to work with the FDIC to develop a set of principles, and
there has been much talk lately about principles-based
regulation. One of the principles on which we are making these
decisions provides guidance to the banking agencies for
implementing to take action against unfair and deceptive acts
and practices, and we believe that set of principles provides
full authority for not only us, but also the OCC and other
agencies to take actions to prevent unfair and deceptive acts
or practices. So, for example, the OCC has recently taken
substantial action, I think it was a credit card case, based on
this, and they were not inhibited from taking those actions
because of any lack of rulemaking. Again, whether an act is
unfair and deceptive depends often frequently on the context
and circumstances.
Mr. Watt. Can I just interrupt you long enough to ask you
to comment on whether you think we need a Federal predatory
lending statute?
Mr. Bernanke. I think good progress has been made in trying
to understand how to distinguish predatory lending from
legitimate subprime lending. That is always the challenge. How
do you define the rules in a way to address predatory lending
without driving out legitimate subprime lending? And what we
have seen lately is that a number of States, and your own
State, North Carolina, has been one of the pioneers there, have
introduced legislation which have moved the ball forward in
terms of achieving that objective. And I was very pleased to
see that because I think the States are good laboratories. They
can really try out different things, and we can see what works
and what doesn't work.
At some point when we understand well enough how to
distinguish between predatory and legitimate lending, probably
a Federal standard would be a good idea because it would
eliminate the many differences across States and make it more
costly for lenders to lend on a national basis. I don't really
have a good judgment as to whether the States have reached a
point where we feel, you know, we are ready to do that, but at
some point we should really consider--
Mr. Watt. In the meantime should we be talking about a
Federal floor as opposed to a preemptive stand?
Mr. Bernanke. I have no objection at all to your discussing
those issues. I think the question is making sure that you are
making a clear distinction between predatory--
The Chairman. I would ask the gentleman to yield. I just
want to say, first of all, the question he raises is a very
important one that is widely--is of great concern to the civil
rights community. I will say a couple of things, if I could,
because this is really essential.
First, the State versus Federal has been complicated by the
very strong preemptions of State law issued by both the Office
of the Comptroller of the Currency and the Office of Thrift
Supervision. So part of the problem we face is that some of
those State laws that we agree are good ideas don't reach, for
instance, operating subsidiaries of national banks. So the
argument for me being at the State level would have been
stronger if it hadn't been for those preemptions.
Secondly, with regard to the rule--and the gentleman's
question is one many feel strongly about. I understand your
argument that you can still reach these after the fact, but
some people feel, and I am inclined to agree with them, that
there might be a greater deterrent effect if there was to be
some rulemaking. It is one thing to go to people's rescue after
the fact, but it does seem to be a proliferation here, and that
is why we think we may need more. But we will be continuing
this discussion.
Mr. Watt. I yield back, Mr. Chairman.
The Chairman. The gentleman from California.
Mr. Royce. Thank you, Mr. Chairman, and thank you, Chairman
Bernanke.
This committee has been debating GSE reform now for some
time, I think for about 4 years now. Surprisingly, while
debating reform with Fannie Mae and Freddie Mac, we have not
heard testimony from the Federal Reserve on this topic, and we
are going to re-engage in this debate next month, and I was
wondering if you would be willing to come up and to testify as
to the Federal Reserve's view on GSE reform. I think it would
be very helpful for all of us.
Mr. Bernanke. The Federal Reserve has testified in the
past, I believe. I believe Chairman Greenspan has testified,
but if that is not the case--
Mr. Royce. He has testified as to the subject, but I am
thinking about the hearings we are going to hold specifically
on GSE reform. And that was my question as to whether you might
testify on that.
Mr. Bernanke. We would be very interested in having our
perspective heard on this issue.
Mr. Royce. I hope the committee leadership can accommodate
you on that.
I also wanted to say that it is not just New York that has
grown quite concerned about the disadvantage competitively that
our capital markets face and the flight of capital. I think all
over the United States, people are getting worried. We saw the
Bloomberg-Schumer report, and then the Committee on Capital
Markets Regulation report that came out, and they have really
stressed this issue.
And I also noticed last November, the late Dr. Milton
Friedman said this, and I would just like to read it quickly.
He said, ``Sarbanes-Oxley is very unfortunate. It tells every
entrepreneur in America, don't take risks, that is not what we
want. The function of the entrepreneur is to take risks, and if
he is forced not to take risks and spend on accountants rather
than products, the economy is not going to expand or grow.''
And then also the same month, Alan Greenspan said that most
of Sarbanes-Oxley is, ``a cost creator with no benefit I am
aware.'' And he went on to say that regulatory and statutory,
statutory changes need to be made as well if we are going to
move forward. And he concluded with something that I thought
was rather forceful. He said, ``I hope it happens before the
whole financial system walks off to London.''
It seems to me that Dr. Greenspan and others were concerned
that the regulatory climate will not only deter investment in
the country, but that it is also going to suppress future
entrepreneurship and suppress innovation. And I was going to
ask you because, you know, if they are correct, that could have
a very harmful effect not only on future U.S. productivity, but
as a result of that will reduce the potential standard of
living gains in this country.
And so, Chairman Bernanke, do you share the concerns of Dr.
Greenspan and Dr. Friedman on this issue?
Mr. Bernanke. Let me say this: I think it is very important
that as we try to achieve the objectives of greater clarity and
transparency in corporate governance and internal controls and
so on that we do it at the lowest cost we can, and I think that
it is a good development that the Public Company Accounting
Oversight Board along with the SEC has recently promulgated for
a comment a new audit standard which would be less ``checking
of the box'' and more focused on the major concerns of the
company, and also that would take into account the size and
complexity of the company, so we wouldn't be putting these
costs on the smaller companies. I think that is an important
step in the right direction. I would be curious to see how that
goes.
More generally, you know, as a regulator, I think it is
very important that we have to achieve the objectives that
Congress gives us, and there are some very important ones, but
we also need to do the best we can to minimize the cost and
unnecessary burden created by those regulations.
Mr. Royce. But going back to my question, and quoting
former Chairman Greenspan again, he spoke to the regulatory
changes that you spoke to, but he also spoke to statutory
changes that he thought were necessary. And that very much
concerns us going forward in terms of whether or not we
addressed these recommendations made by the Bloomberg-Schumer
report or made by the Committee on Capital Markets Regulation
report.
Mr. Bernanke. We are continuing to monitor the application
and effectiveness of Sarbanes-Oxley. I am not prepared at this
point to call for any specific legislation changes. I would
like to see how the audit standard works.
Mr. Royce. Well, in the meantime, to paraphrase Dr.
Greenspan, hopefully it will happen before the financial system
walks off to London, because as I read the papers every week,
that egress, that exit, is becoming more and more pronounced,
and we have an arithmetical increase not just of capital
flight, but also a resistance of companies coming into the
public market in the United States. Capital is basically
avoiding our capital markets with very dire consequences, I
think, in the long term, to the standard of living here in the
United States and our competitive position.
Mr. Chairman, thank you.
The Chairman. Thank you.
The gentleman from California.
Mr. Sherman. I would like to comment first on the
gentleman--the other gentleman from California, and that is
that we have in our capital markets kind of a one-size-fits-all
approach. You are either a private company, or you are so
public that your statements are so good that if widows and
orphans want to put 100 percent of their net worth into your
stock, it is entirely legal to do so. We might want to explore
some intermediary category where the amount of disclosure does
not meet full-blown Sarbanes-Oxley on the one hand, and
investment, while publicly traded, is only among highly
accredited investors who are investing less than 1 percent of
their net worth. I think as long as--to be a public company,
you have to be a company that I want my mother to, legally at
least, be able to put 100 percent of her net worth in means
that you are going to have to meet a very high standard.
I have a number of questions for you. One is to respond to
that, and I will lay out a few others, and you will probably
have to respond for the record, Mr. Bernanke. But if I talk
fast, maybe you will be able to comment orally.
The first is, you have talked about the problem of income
inquality. Do you know of any systematic economywide approach
with a near-term effect to deal with such income inequality
other than making our tax system more progressive?
Second, we have a lot of smart, educated young people. They
go and get college educations, but they only have the slightest
information about which careers will be in demand by our
economy. Should we publish an official guide that is forward-
looking, that uses our best economic resources to project for
the guidance of young people what careers will be in demand in
the decades to come?
Third, over in the Senate you talked about your concern
that the ILC loophole could be used to mix banking and
commerce. I wonder if you have an equal concern--I hope you
have an equal concern--about the exploitation of other
loopholes that combine real estate brokerage with banking, or
auto sales with banking, or any kind of sales with banking on
just on the pretext that the sale--that the consumer needs
financing. And I hope that you are as strong at preventing
bankers from getting into commerce as you are in preventing
commercial firms like Wal-Mart from getting into banking.
Last year we talked about the need for certain--my
perceived need for an emergency plan to be available to deal
with a precipitous decline of the dollar. You responded to me
in the letter of April 25, 2006, noting that from 1985 to 1988,
we had a roughly 40 percent decline in the value of the dollar,
and the sky did not fall. But do you think that the risk of a
40 percent decline in the U.S. dollar in 4 weeks, rather than 4
years, is so remote that we shouldn't think about it, or are
you just confident that our society and the world trading
system could adjust to it? Or should we be doing some planning,
given that we have had another year since we have talked last
of record trade deficits?
Finally, the New York Fed processes dollar transactions. We
recently stopped two Iranian banks from having access to that
through U-turn transactions. What would be the effect if we
prevented all Iranian banks from having such access? I ask for
you to comment from a technical monetary policy, you know,
banking regulatory policy. Obviously we have other venues to
talk about, whether that would be a good approach in
negotiating with Iran. Or could we cause significant concern in
Tehran if we didn't stop at the two banks, but went with all
Iranian banks in banning their access to transactions through
the Fed? Do you have any other comments?
Mr. Bernanke. I can respond quickly to a few. Multiple
standards for Sarbanes Oxley is an interesting idea, but I
would note that the audit standard that allows size and
complexity to be a consideration does to some extent do that.
On income inequality, this is a very long-term trend. At
least since the 1970's, and according to some measures from the
1950's, we have been seeing this trend, and I don't think there
is any really good way to reverse it overnight. I think it is
going to be a slow progress.
Mr. Sherman. Although a more progressive income tax system
would do a lot to change the ultimate flows of income, or do
you disagree?
Mr. Bernanke. It would not do so without some cost to
incentives and the like.
On official guides to future skills, I think the best thing
we can do for young people is to make sure they have good
general analytical skills, and that they are not--it has turned
out well for us that we don't necessarily put kids in the
eighth grade--
Mr. Sherman. So if we had lots of people with good analytic
skills--
The Chairman. I'm sorry. We don't have time for further
questioning. I will give the gentleman 30 seconds.
Mr. Sherman. Please continue.
Mr. Bernanke. I would focus on general problem-solving
skills that are most flexible.
On real estate brokerage, the Federal Reserve and the
Treasury have never had an opportunity to make a determination
about whether this fits under the Gramm-Leach-Bliley law.
Congress has not permitted us to go ahead with that, and so we
have had an opportunity to look at it.
With respect to financial crises, I would just say that the
Federal Reserve takes financial crisis management extremely
seriously, and we have made a number of efforts to improve our
monitoring of the financial markets to study and assess
vulnerabilities, and to strengthen our own crisis management
procedures and our business continuity plans. And, I hope we
never have another financial crisis, but should one ever occur,
we want to be well prepared for that.
I would have to get back to you on the Iranian question.
The Chairman. Thank you.
The gentleman from Connecticut. And the Chair will announce
that the Chairman has been very gracious to agree to give us
until 2 p.m.--we will take a break for about 15 minutes at
noon. So the gentleman from Connecticuit will--after his
questioning and answers, we will take a 15-minute break.
Mr. Shays. Thank you for being here.
I want to kind of agree with Congressman Watt. I thought
the responsibility of the Fed Chair was to speak in tongues, so
I have been a little shocked that I can actually understand
you. The only other person I have trouble understanding is
sometimes the chairman when he gets excited.
I want to ask you, I think of ourselves as a consuming
Nation that drives our economy, and yet I wrestle with the fact
that we talk about how we should save. Now, I am a consumer.
The only savings I have is my house and my Thrift Savings Plan.
Should I feel guilty?
Mr. Bernanke. It is not a question of feeling guilty. The
question you want to ask yourself is, are you well prepared for
retirement?
Mr. Shays. Well, really what I am trying to say is if I
want my country to be stable, are we asking Americans to stop
consuming and to save? What are we asking them to do?
Mr. Bernanke. Well, I think the issue is at the national
level. Your question is at the individual household level. At
the national level, low rates of savings create the need to
borrow from abroad, and it does have some risks involved. The
most direct way to address savings is to try to improve the
saving of the government sector.
Mr. Shays. What confuses me is that we are trying to get
consumers to consume so that our economy moves forward. So I
just wonder how you would wrestle with that, and how do you
wrestle with it?
Mr. Bernanke. There is no inconsistency. In short-term
business cycle dynamics, consumer spending can drive growth.
But over a longer period, if people save more, then that can be
replaced by higher, stronger investment spending, for example,
and that would be a desirable way to go.
Mr. Shays. Okay. With regard to tax cuts, I believe that
dividends and capital gains in particular have had a huge
impact in getting us to have constant growth since we have
lowered these rates. I am concerned that my Democratic
colleagues are going to allow these tax rates to go up. I am
interested to know your opinion.
Mr. Bernanke. I think most economists would say that lower
dividend and capital gains tax rates have efficiency gains.
They are providing centers for saving. They reduce distortions
in capital structure. They allow retained earnings to be
circulated back into the capital markets, and there are many
other areas where I think they contribute to efficiency in the
economy.
As always, with any tax measure, there are competing
considerations of revenue and progressivity and so on. And as
you know, given my position as the head of a nonpartisan
central bank, I can't really take positions on specific
measures.
Mr. Shays. Well, okay. It just seems to me that you can
give us advice as to whether or not you believe that continuing
these low rates will contribute to a stronger economy. And if
you don't think that, then you should tell us. If you think
that letting them go up will not impact our economy, you should
tell us that. I think that is a fair question.
Mr. Bernanke. Well, let me say this, which is that there
needs to be a balance between spending and taxes. So I think
that well-designed lower taxes can contribute to a stronger
economy. But there is also a responsibility to make sure that
the spending is commensurate with that.
Mr. Shays. Right.
Let me get to the next one. When I am encouraged to
refinance my house and pay 2 percent to 3 percent, you know,
and then you look at the fine print, and you are paying 7
percent or more. So I see this, and think that--well, I am not
following them. I think a lot of people are. What is the role
of the Fed to try to address that issue, if any?
Mr. Bernanke. The size of the cost to refinancing?
Mr. Shays. The incredible amount of effort to get consumers
to basically use their homes, thinking that they are only going
to pay a 2 percent or 3 percent rate, when in actual effect
they are going to pay 7 percent or 8 percent. They have to pay
it. They just don't have to pay it each year.
Mr. Bernanke. Adjustable-rate mortgages and the like.
Mr. Shays. Adjustable rates, but where they actually pay
less each year, less than the rate they are being charged.
Mr. Bernanke. Those are option ARM's and so on. Those have
negative amortization.
Mr. Shays. I shouldn't have said it that way. But the
bottom line is that I am scared many people are just going to
fall into that trap.
Mr. Bernanke. I share your concern. As I was discussing
earlier, our nontraditional mortgage guidance is very clear
that lenders should, first of all, make sure people understand
what it is they are signing, what they are getting involved in,
and secondly should underwrite in such a way that if the
borrower stays in that mortgage and rates go up, then the
borrower will be able to make the payments and not be
foreclosed.
Mr. Shays. Thank you. I yield back.
The Chairman. We will now take a 15-minute recess.
[Brief recess]
The Chairman. We are going to convene a minute early, but
the next person on our list here is from Kansas, Mr. Moore.
Would someone please close the doors--thank you--and Mr.
Chairman, we appreciate, again, your giving us all this time.
The gentleman from Kansas is recognized for 5 minutes.
Mr. Moore of Kansas. Thank you.
Mr. Chairman, thank you and welcome to the committee, and I
appreciate your coming here and taking our questions.
I want to follow up on kind of an area at least that the
gentleman from Texas asked you about, and that was our debt as
a Nation and what that is going to do to future generations in
our country.
I have seven grandchildren, and I am very concerned that we
are accumulating a debt in this country that presently stands
at $8.7 trillion. I understand it has gone up approximately $3
trillion in the past 6 years, and I was at the White House
about 6 weeks ago, and I had a chance to talk with the
President. I said, Mr. President, I am not pointing a finger at
your Administration, and saying it is your fault, because this
goes back 25 years, 30 years, but through a process of
borrowing and accumulating debt, interest on our national debt
now stands at $8.7 trillion, and as I think Mr. Paul pointed
out, over 40 percent of our debt is held by foreign nations.
Should we, as a Nation, be concerned about that much debt?
Should we, as a Nation, be concerned about the fact that more
than 40 percent of our debt is held by foreign nations? If for
any reason, whatever reason, foreign nations decide to sell off
our debt, what impact, if any, would that have on interest
rates in our country?
Mr. Bernanke. The Federal debt that I am most concerned
about is sort of the implicit debt, the debt associated with
our promises to future retirees for Social Security and
Medicare. If we were to stop here in some sense, it would not
be quite so bad. The amount of government debt held by the
public currently is about 37 percent of the GDP, which is
fairly normal across industrial countries, lower than some in
fact, but the situation is going to get a lot worse as we have
retirements of the baby boomers and so on and medical care
costs go up.
According to the Congressional Budget Office, in the
immediate scenario, by 2030, the debt, instead of being 37
percent of GDP, will be 100 percent of GDP, and the deficit
will be 9 percent of GDP instead of being a little under 2
percent as it is this year. So, if we allow things to continue,
the debt interest cycle will continue to build up, and we will
hurt our fiscal position to the detriment of our children and
grandchildren.
On the issue of holding the treasury debt, the reason that
foreign countries hold our debt is, for the most part, because
they find it beneficial to themselves to have ownership of this
very safe, liquid, and convenient form of assets, and I find it
unlikely that anywhere in the foreseeable future there will be
a major sell-off of any kind. If there were to be some sell-
off, there would probably be some short-term effects, but--
Mr. Moore of Kansas. What kind of short-term effects, Mr.
Chairman?
Mr. Bernanke. We would have movements in the asset
financial markets, responding to the sale of the treasuries and
other securities.
Mr. Moore of Kansas. Would interest rates respond to the
sale of securities?
Mr. Bernanke. The impact effect of large sales of
treasuries would be to raise interest rates, yes, but over a
longer period of time, I believe interest rates are determined
by fundamentals, by Federal Reserve policy, and I would also
point out that the ownership, say, by the Chinese, of dollar-
denominated assets is less than 5 percent of all of the fixed-
income dollar assets in the world, even though it is a larger
share, as you point out, of the treasury market. So I do not
consider that to be a major concern.
As I mentioned earlier in response to a question, there
could come a point where foreign investors become less willing
to accumulate more of our debt and would begin to drive up
interest rates, and in order to avoid that contingency down the
road, we should probably be trying to bring our current account
down gradually over time.
Mr. Moore of Kansas. Well, I understand, and I appreciate
the fact that you, I am sure, feel a responsibility not to
alarm people by any statements you might make, but my concern
again is if foreign nations decide for whatever reason to sell
off our debt, that is going to--there is the old law of supply
and demand in effect, and if foreign nations are not going to
hold our debt, that means that we are going to have to finance
that, and I would think that would cause interest rates to go
like this.
I remember 30 years ago there was a guy named Jimmy Carter,
who was President of the United States. We had interest rates
going up to 12-, 14-, 16 percent. That would be absolutely
devastating for our Nation right now, and I am not trying to be
an alarmist here. I just do not want to see us get in a
position where anything like that happens again to our country,
because that would be devastating, I think, for small
businesses, for consumers, for people in this country, and that
is my concern, I guess.
One more question. Oh, we are out of time. Sorry.
Mr. Chairman, thank you very much.
The Chairman. Would the Chairman like to respond?
Mr. Bernanke. No.
The Chairman. Well, then we will take one more question.
Mr. Moore of Kansas. Okay. I understand that you all have a
rule that says that the presidents of your banks have to retire
at a certain age.
Is that consistent with what some people are saying, that
because of life expectancy going up that we should require
people to retire at a certain age?
Mr. Bernanke. We have thought it valuable to have some
turnover there. We do not have quite the same pressures that
the private market would have, you know, with leadership in a
company, so we think that getting new leadership is beneficial,
but if there are concerns I would be certainly willing to ask
our committees to look at that. I have found, basically, that
there has been a reasonable amount of turnover in the sense
that people do not stay so long as to stagnate, but they stay
long enough that their knowledge and experience can accumulate.
The Chairman. Of course, they could always retire, rest for
a few years, and then run for the Senate.
The gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman, and Chairman
Bernanke, thank you for your patience.
To some extent, I would like to follow up a bit on a line
of questioning from my colleague from Kansas, and I know that
his commitment to the long-term fiscal health of our Nation is
a very sincere one. We sometimes come about it in different
ways, but I know his commitment is sincere.
I was reviewing testimony you gave before the Senate Budget
Committee recently on entitlement spending, and you have
alluded to it today. I have had the occasion now to hear from
the heads of OMB, GAO, CBO, and the Secretary of the Treasury,
and there seems to be consensus among all of them that the
number one fiscal challenge we face as a Nation is the pace of
growth in entitlement spending.
Would you concur in that assessment that it is, indeed, our
number one fiscal challenge?
Mr. Bernanke. Yes, or, more broadly, how to deal with the
aging of the population.
Mr. Hensarling. You spoke earlier about the percentage of
debt to GDP by 2030, and you mentioned, I guess, the challenges
of trying to, without entitlements, reform the level of
spending decreases or tax increases, some combination of the
two. I think I heard you say before we are not going to grow
our way out of this challenge, is that correct?
Mr. Bernanke. That is correct.
Mr. Hensarling. If Congress ignored any entitlement
spending reforms and chose no other offsets within the Federal
budget, using 2030 as our guideline--it is kind of a good
placeholder for the next generation--have you looked at models
on what type of tax burden would be necessary to be placed on
our people to balance the budget, say, in 2030?
Mr. Bernanke. Well, the projection would be that in 2030
the entitlement programs would be about 15 percent of GDP,
which means that the entitlement programs and interest on the
debt together would be something about our total budget today.
So increases would have to be related to how much additional
spending you would have. If you want to keep nonentitlement
spending constant, you would have to raise tax rates
approximately 6 or 7 percentage points of GDP, from about 18
percent now to about 25 percent of GDP, with no other changes
in order to retain about the same deficit.
Mr. Hensarling. The Comptroller General has previously
testified that if that happens, in his opinion, we are on the
verge of being the first generation in our Nation's history to
leave the subsequent generation with a lower standard of
living, less opportunity.
Would you agree with that assessment?
Mr. Bernanke. Those are very high tax rates, and they would
have adverse effects on growth.
Mr. Hensarling. Changing subjects, Mr. Chairman, the debate
about trade versus protectionism is as old as our Republic is.
It is a debate that has certainly reared its head again in our
Congress, many believing that somehow present trade policies
have negative impacts on low income. I recently saw some Bureau
of Labor statistics figures that indicate, within the last 5
years, the price of durable goods have dropped 8.7 percent,
appliances 6.5 percent, toys 25.8 percent, and televisions 55.4
percent. Low-income people in the Fifth Congressional District
of Texas, whom I represent, buy televisions, toys, durable
goods, and appliances, and last I looked, each of these had a
very heavy trade component.
If trade barriers were erected, might the cost of these
actually go up instead of decrease, and might that have a
detrimental impact on low-income Americans?
Mr. Bernanke. Certainly. Yes, I agree.
Mr. Hensarling. That was such a quick answer that I was not
ready for the next question.
Mr. Bernanke. Well, I can elaborate.
Mr. Hensarling. No. I think I will quit while I am ahead,
Mr. Chairman. I think I will quit while I am ahead.
To the extent that I have any time left, subprime lending--
you mentioned that there is a great challenge in figuring out
the difference between predatory and subprime. I believe the
world works off of incentives.
Are subprime lenders incented to actually take back the
collateral, to take back the house, to repossess it,
particularly since, I think you testified, we are now in a
softening real estate market, and if that is not the incentive
structure might the competitive marketplace help ameliorate
what we are seeing as far as some of the high foreclosure
rates?
Mr. Bernanke. To some extent, that is correct. It is
certainly the case that subprime lenders, certainly the
legitimate subprime lenders, are not looking to have
foreclosures. It is bad for their business--they lose money--
and we have seen some failures of small lenders, and we have
seen credit default swaps that measure the risk of subprime
mortgages, those spreads widen considerably, and so, clearly,
it is not in the interest of lenders to make bad loans.
Mr. Hensarling. I am out of time. Thank you for your
testimony.
The Chairman. The gentleman from North Carolina.
Mr. Miller of North Carolina. Thank you, Mr. Chairman, and
Mr. Chairman.
Mr. Chairman, I also read your remarks in the Greater Omaha
Chamber of Commerce that Ms. Waters spoke of. She said she was
very moved in reading it. I am not sure I have ever really been
moved by a speech by an economist, but I have found a fair
amount to agree with in what you have said, and there were
things that we had discussed earlier when you testified here
before and, actually before that, things that--topics about
which I had questioned Chairman Greenspan earlier.
You talked about the widening inequality, that between 1979
and 2006 the wages of the people who are right in the middle
had gone up by a total of 10.5 percent, the people in the
bottom quintile, the bottom 20 percent, 4 percent, and those in
the top quintile had gone up 34 percent, that the share of
after-tax income for the top 1 percent had almost doubled as a
percentage of all wages, all compensation from 8 percent to 14
percent over a slightly lesser period of time, and that even
within that 1 percent there was a widening inequality.
I asked you then about what programs we could get at, and
you mentioned education again and specifically community
colleges, life-long learning, job training, how to make sure
that our workers have the skills to be personally responsible
for increasing productivity so they might be compensated
better. In the President's most recent budget, all line items
for career and technical education in 2007 were $1.312 billion,
and in the proposed budget it is $617 million. So it is being
cut by more than half.
Does that show a commitment--is that what we need to be
doing if we do recognize income inequality as a significant
problem for society?
Mr. Bernanke. One point I tried to make in my remarks was
that solving these problems of retraining and job search in
life are difficult, and people may differ on how best to
accomplish it. I do not know from your numbers whether there
were offsets in other programs or different approaches--I
simply do not know--but I think there is a legitimate debate
among all of us about what are the most cost-effective,
effective ways, to help people overcome the skills gap so that
they can get better work.
Mr. Miller of North Carolina. Actually, Mr. Sherman
mentioned a systematic economic approach to approaching income
inequality. I think before, I just asked if you could name any
program that addressed anything Congress was doing and the
President was doing that seemed to be addressing economic
inequality, growing differences in income, and you mentioned
specifically education. That was what you talked about.
If we are serious about closing economic inequality, isn't
that exactly what we should be looking to, making a real
commitment to job training, to adult education, to education
from pre-kindergarten all the way through life-long learning?
Mr. Bernanke. I think we should, but I do not want to
support or attack any specific program because there are many
approaches to doing it. The President will, no doubt, reply
that he has the No Child Left Behind Program, which is an
attempt to increase the quality of schools.
Mr. Miller of North Carolina. Which has also been funded at
much less the level than what was promised, dramatically less,
and actually the very programs within No Child Left Behind that
are most clearly directed at closing achievement gaps are the
very programs that have been cut the most.
Chairman Bernanke, you also, in your speech in Omaha,
talked about the kind of superstars in the world economy and
how much--given what the economy is like now, relatively small
differences in ability or in appeal from the very, very best
and people who are just very, very good but not the very, very
best--resulted in dramatic differences in income, and then you
also mentioned CEO pay and said that in many cases CEO's who
had failed spectacularly, who had appeared to have crashed and
burned, had still done very well or were still compensated at
breathtaking levels, and in earlier testimony you said that
European CEO's appeared to be paid significantly less than
American CEO's.
Are European companies doing significantly less well
because they do not have the superstars? Is there anything that
suggests, really, that there is a difference based upon skill
level between American CEO's and European CEO's?
Mr. Bernanke. I have not really studied that. I think that
there are some CEO's in Europe who are paid lower levels, and
probably there are fewer in sort of the same league as the
American CEO's.
I think it is very important that boards of directors take
shareholder interests very seriously when they make these
compensation decisions, and that they try to attract the very
best talent, and that they pay in a way that will motivate good
performance.
The Chairman. The gentleman from New Jersey.
Mr. Garrett. Thank you, Mr. Chairman, and thank you, Mr.
Chairman, for your testimony today. I appreciate your spending
the time with us.
I would like to go back and begin my questioning with a
topic that is of great importance to me, and we have already
touched on it, at least with one series of questioning, and
that is dealing with GSE reform.
On the one hand, I am pleased to see that the
Administration is taking what I would say is a slightly tougher
tone, if you will, on pushing for a brighter line test between
what is appropriate and what is inappropriate between the
primary and the secondary markets and what the GSE's are
involved in. That is on the positive side.
On the negative side, from my position, I have seen
something of a softening with the Treasury stance with regard
to portfolio limitations, which I believe should be a true
concern to us. I know that there are ongoing negotiations, if
you will, between the Treasury and our esteemed and gracious
chairman behind us to try to reach a compromise on this issue,
and as part of the negotiations there is consideration of what
has been dubbed the MTI, the mortgage tax increase, better
known as the ``Housing Fund,'' and I would be curious to have
your take on an aspect of that.
I raised a similar question to you when you were here
before the committee a year ago and new on board, but I know
since that time you have had an opportunity to get into the
weeds a little bit more on this topic. You have already
testified here and before other committees with regard to the
importance of the housing market in general to our boom in the
economy that we have had and the slight slowness of the housing
market and what impact that could have on the overall economy.
My first question to you is: What additional impact could
we see if we did have a tax, if you will, on that marketplace
by having a fee or an assessment on the GSE's for this new
Housing Fund, or the MTI?
Mr. Bernanke. So you are arguing that the Housing Fund
would raise the cost of mortgages because we are putting a tax
on the GSE's?
Mr. Garrett. Yes. Well, we know the corporations in general
do not pay their taxes in one way or another. The cost of doing
business is not borne by the business but is passed on to the
consumers in one sense or another.
Here, the business that it is being passed on is to the
low- and moderate-income homeowner who is trying to get into
the market, which is the whole idea behind GSE's.
Mr. Bernanke. Well, I have not done any analysis of that
particular issue.
I would reiterate what I said before, which is I think,
that it is important for the GSE's to support affordable
housing. The way I would recommend it would be to tie their
portfolios to affordable housing products, for example, by
holding MBS that are based on affordable housing mortgages, for
example. That would seem to be a direct way to both create some
limits, some limitation on the rapidity of the expansion of
their portfolio, while still having a direct impact on the
affordable housing.
I have not taken a position on the Housing Fund, and I am
afraid, if I do so, it will be portrayed as a change in
position, because the Fed is focused very much on the safety
and soundness and the systemic risk implications of the
portfolios, and I think that is where the Federal Reserve needs
to keep its focus.
Mr. Garrett. Do you agree with my basic economic assessment
that when you have a corporation such as GSCR or any
corporation in general that the taxes that we assess on them
are not borne, in essence, by them, but it has to be passed on
to someone?
Mr. Bernanke. Well, it could be passed on to the
shareholders in terms of a lower share price. That is another
possibility. So I would have to think about the incidence of
that.
Mr. Garrett. And, of course, the economic philosophy to
that is, when you put a cost onto the share price of a company
where they have to get their investments from, that impacts
upon the economy. We can go into that.
Can you elaborate a little bit more on the portfolio idea
that you were talking about? I am limited in my time here. Are
you suggesting that you allow them to increase the--or have an
increase in the portfolio size of those holdings for the low-
and moderate-income portfolios, and if that is the case,
doesn't that go beyond what the GSE's were intended for--or
what the portfolios were intended for in the first place? They
were just for securitizing the loans, and they were just there
to be in and out, if you will. Why would we need that to occur?
Mr. Bernanke. I think the ideal situation would be one in
which the portfolios did exactly what you said. They were to be
the weigh station for securitized mortgages, and they would
contain mostly liquid assets for the purpose of purchasing
mortgages and then selling them back to the market.
Mr. Garrett. Right.
Mr. Bernanke. I would like to see a bill. I think we need
to have a strong regulator in this arena, and we need to find
some way that we can limit the growth of the portfolios. As a
practical matter, I think that restricting portfolios to
mortgages related to affordable housing might be an appropriate
compromise and an appropriate approach that would provide some
limitation, but the Federal Reserve has always been concerned
about the size of portfolios. It never has found a substantial
benefit to homeowners from large portfolios.
Mr. Garrett. Does the Treasury have the authority--
The Chairman. Gentlemen, we are into the timing.
The gentleman from Missouri.
Mr. Clay. Thank you, Mr. Chairman, and thank you for
holding this hearing.
Mr. Bernanke, welcome. I represent the First Congressional
District of Missouri, which is comprised of north St. Louis
City and north St. Louis County.
Continuing with the same line of questioning as the
gentleman from New Jersey about housing, in my district, and in
many other districts across the country, we have a tremendous
housing crisis. This must be addressed, and it must be done
with urgency, especially when it comes to affordable housing.
What changes in housing policy can be made that the United
States can better foster an urban housing policy that puts
people in homes in the inner cities so that they can build
wealth through ownership and pass it on to future generations?
What are your ideas on this, and what is your approach to this
housing crisis?
Mr. Bernanke. Well, I recently had the opportunity to visit
Anacostia in the District of Columbia and to see some of the
projects going on there, and we saw the actions of community
development financial institutions, CDFI's, who have worked
together with banks, private investors, and with government
sources to finance some very impressive projects, some new
apartments, and some social centers for the community, with
very good results, and I think that collaboration that we saw
with the CDFI's, managing together with some nonprofit
institutions, other nonprofit institutions, and private sector
input, is a very promising approach to this.
Mr. Clay. It sounds like we have to be creative in order to
rebuild our inner cities and to come up with creative concepts
so that people can take ownership of their neighborhoods, of
their communities. It sounds like that is what you are saying,
and you promote those policies.
Mr. Bernanke. Ownership is very important because people
then feel they have a responsibility for their community and
for their home, and it is also valuable to try to develop a
community, not house by house but in a broader sense, because
unless you have a retail area and a school and a social area
and other amenities, the house property values are not going to
justify the cost. So you need to build a neighborhood rather
than just an individual house.
Mr. Clay. Thank you for that response. Let me shift over to
a worker issue.
Yesterday, DaimlerChrysler, throughout the United States
and particularly in St. Louis, announced plans that will affect
approximately 1,300 jobs at our Fenton plant in St. Louis
County. They are losing an entire shift which makes the
minivans. There have been other massive layoffs by the other
automakers. Additionally, these corporations are trying to do
away or drastically reduce legacy cost, healthcare, retirees'
benefits, and pensions. Many of these employees have lost
benefits that were promised them in exchange for working their
careers at their workplace. They earned them, and now, as they
approach retirement, they are not there.
Do you have new approaches or plans for long-term employee
healthcare, retirement benefits and pensions, and how do we
address the problem facing our industrial workers in the
automobile industry and manufacturing sector? We can include
the airline employees and many other workers throughout this
economy in that. What new systems will we put in place to
replace these traditional safety nets that they have worked for
and depended on all of their lives? What solution do you think
we should be putting in place, and what are your thoughts on
this? Could you elaborate?
Mr. Bernanke. Well, first, if firms make promises to
workers with respect to retirement benefits or healthcare
benefits, we should make sure that those promises are kept. The
recent legislation on pensions that Congress passed tried to
toughen up the requirements for funding pensions, tried to make
them more transparent, and to increase the premium paid to the
Pension Benefit Guarantee Corporation. Those kinds of measures
can help ensure that companies will not renege on the promises
that they have made to their workers, so that is very
important.
I would say, more generally, that we need to diversify, to
have more than one source of retirement security. Some people
rely on defined benefit pensions. We need to expand access to
defined contribution plans like 401(k)s and other kinds of
private savings, and then there is, of course, Social Security,
which we want to make sure is on a sustainable, long-term path.
So if we put all of those things together, you can help people
finance a reasonable retirement.
The Chairman. The gentlewoman from West Virginia.
Mrs. Capito. Thank you, Mr. Chairman.
I have a question. You mentioned in your opening statement
that there has been a large amount of consumer spending. We see
a lot of credit card debt by individuals, a lot of higher
education loan debt for young people coming out of college,
also into the professions, medical school.
How are people going to be able to overcome this debt when
the wages are only rising a certain percent? Do you see this as
a long-term problem that seems to be concentrated--I mean, if
you are a college student, you can get a credit card like that
and run it up to the maximum quite quickly and pay $20 a month,
probably, for the rest of your life. What kind of problem do
you think that presents to our economy?
Mr. Bernanke. Well, the incidence of delinquencies and
bankruptcies for the economy as a whole remains quite low.
Because the job market is pretty good and incomes have gone up,
wealth has gone up, the stock market is up, and so on. Most
families, many of them, have home equity built up and have been
able to manage their finances pretty effectively, and as I
said, we have not seen any significant increase in financial
stress in the broader economy.
Now, there are pockets of problems, as I mentioned already
several times, such as the variable rate subprime mortgage
area. I think there are a number of approaches. The one that
the Federal Reserve is particularly involved in is disclosures.
We are responsible for Regulation Z, which implements the Truth
in Lending Act, and it includes such things as the famous
Schumer Box and other things that show to potential credit card
applicants what are the terms, you know, what are the fees and
so on.
We are in the process now of completely reworking Reg Z for
credit cards, for revolving debt, and we anticipate going out
with a proposed rule in the next couple of months, and we have
worked very hard on that. In particular, one thing we have
done--people find it very difficult to understand the legalese
that they see in the credit card applications, the credit card
contracts, and yet of course the legal information has to be
there. Otherwise, it is not a legitimate contract, and so the
challenge is to create disclosures that meet the legal
standards but that are also understandable, and so we have gone
out and done a lot of consumer focus group testing and those
kinds of things to try to find disclosures that will actually
work in practice, and we hope that these new disclosures we are
going to put out for comment in just a couple of months will be
helpful in helping people understand, you know, the terms and
conditions of credit cards and make them use them more
responsibly.
Mrs. Capito. Well, I will look forward to that, and I think
it is an excellent idea, and I think that it is difficult when
you turn it over and look at the fine print. I am admitting to
not reading my credit card disclosures as closely as I should.
I do not often mention it, but I am from the State of West
Virginia, and it is very reliant on coal, and the energy
production is extremely vital to our State economy, but we also
have a population that is very sensitive to gas prices, to the
price of healthcare, to all of the things that hit your
pocketbook immediately.
When you look at the long term, what do you see in terms
of--and I know, in some of your statements, you sort of exclude
the energy prices. Is that because of the volatility of that
or, in trying to move from nonreliance on foreign sources of
oil, do you think we are ever going to make an impact on the
pocketbook of the individual citizen?
Mr. Bernanke. Well, in the short term the demand for oil is
inelastic; that is, it does not respond much to price changes,
and so when there are fluctuations in the demand for oil, you
get these big spikes and movements in oil prices, and we have
seen quite an increase in oil prices in the last few years, as
you know. Over the longer term, higher oil prices actually have
a benefit, which is that they encourage conservation, and they
encourage alternative supply sources. Coal, of course, is
actually a very promising source. It is, of course, a
traditional source of energy, but assuming we can find ways to
address the environmental implications--and there are many
promising directions there--coal could be a very big part of
our energy diversification in the future.
So my expectation is that as long as the markets are
allowed to work, together with some support for research and
development from the Government, together with clear and
effective regulation, that we will solve our energy problems
and that solution is going to come not just from one single
magic bullet; it is going to come from a wide variety of
different alternative sources, including, I think, coal.
Mrs. Capito. Thank you.
Do I have time for one more?
The Chairman. You do. Go ahead.
Mrs. Capito. I have one more quick question, and this is
sort of an educational question for me.
When I read your statistics and I see the large, you know,
macro view that you have, living in a small State that has
fluctuations always sort of at the bottom end of the economic
scale in terms of per capita income, we always feel in small
States that sometimes all of the statistics that we read are
sort of driven by New York, California, Florida, and Texas.
When you are formulating your data that you bring before
us, what kind of considerations do you make for smaller States
or does just the population number drive all of your
statistics?
Mr. Bernanke. Well, we see a lot of State data, for
example, unemployment rate data by State, but the other
important thing about the Federal Reserve is that it is a
Federal--that is, a regionalized--system, and as I am sure you
know, we have 12 Reserve Banks around the country--
Mrs. Capito. Right.
Mr. Bernanke. --and one of the most important elements of
our monetary policy meetings is when we go around the table and
ask each Bank president from each part of the country what is
going on in your State, what is going on in your region, what
is going on in various industries, various sectors, and various
geographic areas within your Federal Reserve district; that
gives us an awful lot of detailed information about what is
happening in different parts of the country. This is a very
large, diverse economy. The aggregate statistics really cover
up a huge amount of heterogeneity in terms of economic activity
and developments in the economy. So we pay a lot of attention
to regional information in trying to understand what is
happening in the economy.
Mrs. Capito. All right. Thank you.
The Chairman. The gentleman from Missouri.
Mr. Cleaver. Thank you, Mr. Chairman, Mr. Bernanke.
We are very likely going to have as a part of the upcoming
elections a great deal of divisive language based on people's
concerns about immigration, and in June of 2006, 500 American
economists, including 5 Nobel laureates, signed an open letter
on immigration and sent it to President Bush and to Members of
Congress, and in that letter we are reminded, sir, that we are
a nation of immigrants, and it talks about the economic
benefits of immigration and speaks to the power of immigration
to strengthen America and to lift the poor out of poverty, and
the consensus reached is that most Americans, contrary to what
is being said on the nightly news, benefit from immigration,
but there is one portion of the letter that I think is
extremely significant, and if you do not mind, I will just read
from the letter:
``Immigrants do not take American jobs. The American
economy can create as many jobs as there are workers willing to
work so long as labor markets remain free, flexible and open to
all workers on an equal basis.''
Now, shortly after this letter was sent to us, Jack Kemp,
George Shultz, Jeane Kirkpatrick, and 30 other non-liberals,
including the former RNC Chairman, signed a separate open
letter on immigration, and it embraced Ronald Reagan's view of
allowing open, sensible immigration, and they go on to recite
Reagan's quote from Winthrop about the city on the hill.
Now, the statistics support these letters, and recent
studies show that since 1980, immigrants have boosted the U.S.
GDP by $10 billion per year, and during the 1990's, when the
labor force grew by 16.7 million workers, 38 percent of those
workers were foreign-born. In other words, at a time when U.S.
unemployment was hitting record lows, immigrants filled 4 out
of every 10 jobs. Now, in January of 2000, your predecessor,
Chairman Greenspan, commented that easing restrictions on
immigration would go a long way in solving labor shortages.
Now, without going on, I am more interested in finding out
whether or not you believe that immigration has a positive or a
negative impact on our economy. Do you share in the philosophy
of the 500 economists, and what do you think should be done
with regard to the American workforce and immigration?
Mr. Bernanke. Well, it is certainly true, as they say, that
immigrants built the country. All of my grandparents were
immigrants, and they came and they had new lives, and they
contributed to our economy. So immigrants have played,
historically, a very important role in U.S. economic
development.
I agree with you that they do not take jobs, and the labor
market does adjust to the number of people available to work.
We have had a lot of immigration. The unemployment rate is
quite low. It is somewhat more controversial. Do they affect
wages? One concern that some people have had is that because
many of the more recent immigrants have relatively low skills
that they compete, to some extent, with low-skilled workers in
the United States and may have some effect on their wages. Most
estimates are that those are pretty small effects, but there
may be some effects. So I certainly agree that immigrants have
played a big role. They continue to play a big role, and we
need to have a national policy on that.
I think I would stop short of recommending a specific
program. This is a very tough issue and one I think Congress
really has to take the lead on about how many people and under
what conditions we admit, but it is certainly the case today
that immigrants are playing a major role in our economy. There
is no question about that.
The Chairman. If the gentleman would yield, could I just
ask: Would it also have implications--you have talked about the
decline in the labor rate participation. Would it also have
implications for our ability to deal with the entitlement
issue?
Mr. Bernanke. It goes in the right direction, but the CBO
has done some simulations that suggest even fairly large
increases in immigration, say from 1 million to 2 million,
would not solve the problem by any means, but it does go in the
right direction.
The Chairman. It alleviates it.
Mr. Bernanke. Yes.
The Chairman. I thank the gentleman.
Mr. Cleaver. Mr. Bernanke, have you seen the movie, ``A Day
Without Mexicans?''
Mr. Bernanke. I have seen it, yes.
Mr. Cleaver. Would you recommend that for all Members of
Congress and for people running for public office?
Thank you very kindly.
The Chairman. Did you say, ``A Day without Questions?''
Mr. Cleaver. ``A Day without Mexicans.'' It is a new motion
picture that--
The Chairman. The gentlewoman from Minnesota.
Mrs. Bachmann. Thank you, Mr. Chairman, and thank you, Mr.
Chairman, for being here before this committee.
I have appreciated your responses to the questions, and in
particular, my colleague, Mr. Hensarling from Texas, had asked
you about the entitlement problem that we will be having, and
that is where my question is going as well. He had mentioned
the Comptroller General and some of the comments that the
Comptroller General had made. One of those that really captured
my attention was the statistics that he gave that already our
Federal Government's net liabilities exceed $43 trillion or
about $350,000 for every full-time worker in the United States.
Without fundamental changes and absent any movement by the
Congress on changes in our entitlement, I am just wondering,
Mr. Chairman, do you believe that there is any plausible amount
of tax increases that could possibly deal with the coming
crisis in our entitlement programs?
Mr. Bernanke. Well, the tax increases would have to be
quite large. The Congressional Budget Office has done some
simulations, assuming 25 percent tax increases, which do not
quite solve the problem. So it would have to be a pretty large
increase in taxes to solve it.
Mrs. Bachmann. And that is something that, I think, haunts
all of us as we are looking toward the future, especially
toward 2030. We are concerned about that. I appreciate your
response on that.
My next question deals with a happier subject of
productivity, and that is something where the United States has
been phenomenal in the area of productivity. You are quite
familiar with the President's economic report that noted that
between 2000 and 2005, here in America, we had a productivity
increase of about 3 percent, which far outpaced the
productivity growth levels in the other G7 nations. Whereas
many of them suffered a slowdown in productivity growth, the
United States, in fact, accelerated and is at an enviable
level.
I am just wondering, sir, if you have insight into perhaps
what some of the factors are that led to this remarkable
productivity growth given that Western European nations as well
as the other G7 nations have the same access to technological
improvements as, say, the broad capital markets that we have. I
am just wondering if you could state for this committee why we
have seen better results here in the United States than we have
seen in the other G7 countries.
Mr. Bernanke. That is an issue that has received a lot of
attention. It is a good puzzle why we have gotten differential
results. I think the answer is the interaction of the
technologies and the economic system.
To go back to themes we have already addressed today,
technology creates change, and the system has to be able to
adapt to change in order to make full use of the technology,
and in the United States the combination of very deep capital
markets which have been able to fund new start-up firms or
venture capital support for entrepreneurial activities and a
flexible labor market which has allowed for changes in the way
people work and the distribution of workers across industries
and across occupations has allowed these new innovations, these
technological innovations and information communication
technologies not only to lead to increased productivity within
the narrow sphere of high technology industries but to spread
out through the whole economy and to increase productivity in
financial services, in retailing, in wholesaling, and in
manufacturing.
As firms have been able to apply effectively these
technological innovations, in some countries there is a great
deal of rigidity in the structure of labor and product markets,
and those rigidities have prevented the technological
innovations from being applied as effectively or as quickly as
in the United States.
Mrs. Bachmann. Thank you.
My final line of questioning goes to the legislation that
Congress may very soon pass, and that would be the increase in
the minimum wage. We are looking at increasing perhaps at the
level of 40 percent minimum wage in the upcoming bill.
First, I am wondering if you could estimate how close we
are currently to full employment here in the United States. I
know, in Minnesota, we have just enjoyed wonderful low levels
of unemployment. I think, for 2 months last summer, we were the
job creators for about 10 percent of all new jobs across the
country. We have a wonderfully strong, diverse economy.
I was wondering first if you could comment, sir, on where
you believe we are at in terms of full employment in this
country, and second, I was wondering if you could share with us
what your opinion would be on the impact of raising the minimum
wage on employment. First, at the level that we are looking at
now to go to $7.25, there were comments made by one of our
United States Senators that he may be introducing a bill in
perhaps 6 months to raise that minimum wage up to over $9 an
hour.
So, if you could, just comment on the impact of raising the
minimum wage on employment and where you believe we are at in
terms of full employment now.
Mr. Bernanke. On the full employment issue, I do not know
precisely where full employment is or whether we have reached
it or not. I do know that the economy has come a ways in the
last few years in increasing the utilization of underutilized
resources. The unemployment rate has come down. Capacity
utilization has gone up, and so we are certainly closer than we
were a year or two ago, and, indeed, as you point out, in some
areas labor markets are pretty tight and skilled workers have a
lot of opportunities for work.
On the minimum wage, economists generally agree that a
higher minimum wage will have an adverse effect on employment
of low-skilled workers, but they disagree extremely on how big
that effect would be. Some are saying it would be very small.
Others are saying it would be more significant. So I can only
say that probably there will be some employment effect, but it
is very difficult to know how big it would be. Given that a
relatively small number of workers today are at the Federal
minimum wage, in part because State minimum wages or many of
them are higher than the Federal minimum wage, I do not think
that the employment implications of the proposed bill for the
Nation as a whole would be very significant one way or the
other.
Mrs. Bachmann. And--
The Chairman. We are over time.
Mrs. Bachmann. Thank you.
The Chairman. The gentleman from Tennessee.
Mr. Davis of Tennessee. Mr. Chairman, thank you very much.
I have a comment and then a question.
We hear a lot about undocumented workers in our country,
and we hear between 12 million and 15 million working today who
may or may not have legal documentation to indicate that they
are actually here working as authorized by the certain laws
that we have in this country, and then I hear that we have 4\1/
2\ percent unemployment. The 4\1/2\ percent unemployment means
we have roughly 6 million people in this country not working--
is that about right?--135 million people working.
So, if we were to round up those 15 million undocumented
workers and send them back wherever they came from, would we
have a deficit of 9 million employees to work in America's job
market? What would that do to our economy?
Mr. Bernanke. Well, it is certainly true that where we are
today is that there are a lot of immigrant workers, many of
them undocumented, who are working in various industries
ranging from manufacturing to agriculture to leisure and
hospitality and construction and other areas, and if they were
all to leave immediately then there would be obviously a
disruption in those industries and labor shortages in those
industries.
Mr. Davis of Tennessee. I ask that mainly to make a point.
We have a lot of folks out here today who have a lot of
ideas about America's economy, and we have a lot of ideas about
some of the comments that have been made by many about the
illegal immigration situation.
My real question to you is this: As I go back from about
the 1970's, late 1960's, up through about right now, we have
gone from having a balance of trade in our favor to where we
have gradually gone to a whole other level, over $700 billion
for the last 2 or 3 years in deficits in trade. Now that means
that we are sending $700-some billion more out of America's
economy to other nations of the world that are holding that
money. They are our dollars. It is a part of our capital assets
of this country that is showing that up, and when I look at
that, I get kind of frightened at it, and I look at the
district that I represent and I see a Saturn plant in Spring
Hill that has temporary layoffs, perhaps, and I fear that they
may become more permanent than temporary, those 5,000 or 6,000
jobs that we may be losing. The Carrier Corporation just left
my district.
So when I look at my Congressional district, which is the
fourth most rural in America, this great booming economy that
we seem to have throughout America does not exist in my
district, and it does not exist I believe, perhaps, in most
rural areas of America.
As to the trade deficits and the budget deficits that we
continue to elevate, are we just looking for a train wreck to
happen, and are we sitting here in Congress kind of like Nero
did in Rome as it burned, doing nothing about it? How do we
stop this bleeding of huge deficit spending? Because we have
seen us grow from 18.5 percent in a gross domestic spending
percentage of government to about 20 percent in the last 5 or 6
years. We have seen an increase in spending, a dramatic
increase, and our revenues have gone down to fund government as
the Congress for the last 5 or 6 years has seen fit to spend.
So, in essence, there are two or three problems that I
have, and I think it is hurting a lot of the more rural areas
and maybe not the more urban areas, but we have lost 3 million
industrial jobs. We are no longer producing. In export and
production, we are consuming someone else's production. So how
do the trade deficits, the budget deficits impact us, and when
will we be in a situation where we no longer enjoy the great
economy supposedly that we have, and when will it become a
threat even to the world economy if that does happen?
Mr. Bernanke. That is a very wide-ranging question. I think
I would like to separate that into two issues. One is the trade
aspect, and the other is the budget/current account deficit
issue.
On trade, as I have discussed several times today, trade
can create painful dislocations, painful changes. Competition
from abroad, movements of firms out of the country, can cause
people to lose jobs, and that is a serious problem. On the
other hand, trade also creates a lot of benefits to the
country. It creates a lot of jobs both in terms of exports, and
in terms of transplants. Like you mentioned Saturn. Well, there
are also transplanted auto firms that hire Americans here in
the United States, and as someone mentioned here, it does allow
Americans to purchase goods and services at a lower price than
they otherwise would. So there are disruptions caused by trade.
There are also a lot of benefits from trade, and one of the
messages I have been trying to convey is that the right
solution is not to stop trade or to block trade but, rather, to
try to find ways to help people adjust or to retrain as
necessary to deal with these very real--and I take them very
seriously--dislocations and problems that arise because of this
changing, dynamic economy we have.
A somewhat different question is about the trade deficit
and the current account deficit, and to some extent, it is
related to the budget deficit in the sense that, as I have
indicated, the current account deficit reflects the fact that
our savings rate is low relative to our investment, and
therefore we have to borrow the difference abroad. In order to
mitigate that situation over time, we need to raise our
national saving, and that could be done either in terms of
private saving or it could be done in terms of reducing budget
deficits or increasing surpluses at both the Federal and the
State and local government levels. That is going to take some
time. I think, you know, we do not have to solve this problem
overnight, but we should be, I think, working to reduce the
current account deficit over time and at the same time that we
continue to allow trade and technology to help our economy grow
more quickly.
Mr. Davis of Tennessee. We have actually tripled our
budget--
The Chairman. I am sorry. The gentleman's time is up. We
cannot ask a new question.
The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
Chairman Bernanke, I thank you for being here. I would also
like to thank you for the cooperation of the Federal Reserve in
the new dollar gold coin which we passed through this
particular committee. I happen to be the sponsor of it. I think
this is the issuance date today, as a matter of fact. Although
we did something with the Treasury and the Mint people with
George Washington and the Statue of Liberty on the other side,
but your acquisition of $300 million is a nice start. We hope
to make some $5 billion. So this is something that actually
produces revenue for the U.S. Government.
Going to a subject I want to ask you a question about,
though, this committee, in a bipartisan way, passed the
Sarbanes-Oxley Act in 2002, and you have heard, I am sure, a
lot of criticism on that law--and I have read about it--and
some praise of it one way or another, but they talk about the
rising cost of regulation, and this, according to some people,
is creating an incentive for firms to be listed on foreign
markets or to withdraw from public markets altogether. We have
more private capital and that kind of thing going on in the
United States of America now, and there are other measures
besides Sarbanes-Oxley that are attributed with those problems.
In your opinion, has rising regulatory costs or other
regulatory blocks of some kind or another weakened the
international competitive position of our stock exchanges, and
do they pose a threat to our competitiveness in the future?
Mr. Bernanke. To some extent, the declining relative
position of the American exchanges reflects the natural growth
and development of exchanges abroad, in London, in Asia and so
on, and as those economies, those exchanges become larger, more
efficient, and deeper; that is actually not a bad thing because
it gives, for example, American companies more alternatives for
raising money.
On the other hand, to the extent that business is being
driven offshore by high regulatory costs, which was the
conclusion of these two recent studies on capital market
competitiveness, then that is a problem and we need to begin to
address those costs.
The Sarbanes-Oxley issue that you raised earlier has been
cited by a number of these studies, and the SEC and the Public
Company Accounting Oversight Board have recently issued a new
audit standard which will attempt to reduce the costs of
implementing Sarbanes-Oxley's Section 404 on internal controls
and, in particular, to make it more focused on the most
important matters rather than on trivial matters and also more
appropriate for smaller and less complex firms. So I think that
is going to be an important step in reducing that particular
set of costs.
There are many other issues, some of which Congress could
address--issues of tort reform and litigation, the CFIUS bill
about foreign investment coming to the United States, and
striking the appropriate balance there between keeping a flow
of foreign investment into the United States versus appropriate
national security considerations. The Federal Reserve is
working on the Basel II bank capital accord regulation, and we
are working on that, and we want to make sure that does not put
American banks at a capital disadvantage in the capital
markets.
So it is certainly important for us across a whole variety
of regulatory areas to try to keep those costs down and to keep
working to reduce the burden of regulation on American public
companies.
Mr. Castle. Well, thank you. I do not mean to speak for our
chairman or ranking member here, but I think these issues are
of great importance to this particular committee. So,
hopefully, we can be kept informed.
Changing subjects, I am looking at page 2 of your testimony
in which it says that the Federal Open Market Committee has
maintained Federal fund rates, etc., of 5\1/4\ percent, and it
says that, more or less, the risk of inflation is not
overwhelming at this point. Then it goes on to say--and again,
you have indicated this--the ``predominant policy concern is
the risk that inflation will fail to ease as expected and that
it is prepared to take action to address inflation risks if
developments warrant.'' I suppose I should have learned this in
Economics 101, but in addition, if there is an addition to
dealing with interest rates, are there other things that the
Federal Open Markets Committee can do with respect to that
issue?
Mr. Bernanke. No. That is the basic tool.
The Chairman. If the gentleman would yield.
Mr. Castle. I yield.
The Chairman. He said he could not speak for me, but he
just asked essentially the same question I asked. So, on those
two questions about the congruity of those two statements, I
agree with the gentleman.
Mr. Castle. And I also apologize for being absent and not
here when you asked, Mr. Chairman. I had a good reason for it,
though.
The Chairman. Submit it in writing.
Mr. Castle. I have last year introduced legislation about
transparency in hedge funds. I am concerned about hedge funds.
You answered this yesterday in Senate testimony and basically
indicating that the liquidity of hedge funds could be very
important. I don't have a problem with that either, but I do
have a problem in terms of what hedge funds could do with
respect to commodity markets and a variety of things they get
into because of the enormity of it and the number of them that
have opened in recent years and where they are going.
I am not one who looks for overregulation or
overtransparency, if there is such an expression, but I think
proper transparency is in order. I would like your thoughts, if
you could, about where we are with respect to hedge funds, and
what do you think the role of the--regulatory role or perhaps
our committee role in this area should be.
Mr. Bernanke. Well, the approach that regulators have taken
since the report of the President's Working Group after the
LTCM crisis has been a market-based approach, an indirect
regulation approach, whereby we put a lot of weight on good
risk management by the counterparties to the hedge funds such
as the prime dealers, the lenders, as well as the good
oversight of the investors, the institutions and so on that
invest in hedge funds. And we found that is a very useful way
to control leverage and to provide market discipline on those
funds.
The original report of the President's Working Group also
suggested disclosures, and that never went anywhere in
Congress, and I think part of the problem was it was difficult
to agree upon what should be disclosed and what would be
useful. The hedge funds are naturally reluctant to disclose
proprietary information about their trading strategies and
approaches, and their positions change very quickly, and so
therefore position information can be overwhelming and perhaps
not very useful.
I think it is important to continue to think about hedge
funds. They certainly play an important role in our financial
system. Exactly, you know, what a disclosure regime would look
like, though, is not yet clear to me how that best would be
organized.
The Chairman. The Chair is about to recognize the gentleman
from Minnesota. I do want to thank the Chairman. It is the
first time in my memory that freshman members of this extremely
large committee are able to ask questions because--I appreciate
the chairman being around because we are going to be able to
accommodate our four remaining members, but the ranking member
had one very specific brief question he wanted to ask, and if
there is no objection, I will recognize him for that.
Mr. Bachus. Mr. Chairman, this is more of a concern.
Governor Susan Bies recently announced her retirement. I am
very concerned about that in that she was expert on not only
risk management, but on Basel, and I felt like under her
leadership we made tremendous strides in Basel. She had real
banking experience with a regional bank. And with Mark Olsen
gone, too, I am just concerned that as that process goes
forward--you know, he has a community banking background--that
we had people who were bankers that we deal with as this
process goes forward, because those are two major losses.
Mr. Bernanke. We will miss Governor Bies, as well. She was
an extraordinary colleague and very, very knowledgeable about
banking matters, as you indicate.
I think we will have good continuity. We have the skills at
both the Board level and at the staff level to continue to move
forward effectively with Basel II. And we will, of course, wait
for the President to nominate two people to the Board.
The Chairman. I would like to say to the Chairman that I
hope that you can, in fact, bring the Basel process to a
conclusion and I never have to think about it again for about 6
years.
The gentleman from Minnesota.
Mr. Ellison. Thank you, Mr. Chairman.
And thank you, Mr. Chairman.
Mr. Chairman, in your remarks on page 2, you noted that
real hourly compensation rose at an annual rate of about 3
percent in the latter half of 2006.
Could you describe how the longer period of time, for
example, over the past 10 or, say, 15 years, what have real
wages looked like?
Mr. Bernanke. I don't know the exact number over the last
10 years, but there has been a pattern, we have seen this time
and we saw before, in the late 1990's, when productivity picked
up quickly during that period in the late 1990's, real wages
lagged behind productivity for a while, and then they began to
catch up to it.
I think in the current episode a couple of things have been
at work. One is that the labor market remains somewhat weak
even after the recession ended in 2001. A second concern has
been the oil price increases, given nominal wage increases,
modest nominal wage increases, when oil prices go up so much
that it takes away from the buying power of real wages. And
then thirdly I think it is, again, somewhat normal for real
wages to catch up later in the business cycle to--and
particularly when there have been periods of increased
productivity growth as we have seen in the last 3 years.
So I am encouraged to see this increase in real wages.
Barring new shocks, new increases in oil prices, I would think
we would see further increases in real wages going forward. And
I would just add that the 3 percent number is for the whole
nonfarm business sector, but you get about the same number for
average hourly earnings for production workers, which is more
representative of the broader middle of the middle
distribution.
Mr. Ellison. I am encouraged by the increase in real wages,
too, since the middle of 2006, but I have heard people describe
the real wages over the longer period, maybe 20 years or so, as
flat. And so I don't know if that conflicts with what you are
saying or if it is--or if what you are saying is more
descriptive of more recent events.
Mr. Bernanke. The behavior of real wages depends on the
skill levels. I have some discussion of this in this speech
that Representative Waters referred to on inequality. Over the
last 25, 30 years, we have seen really modest increases in real
wages for those with less than a high school education, much
more significant increase in real wages for those who have a
college education or better, and intermediate increases for
high school graduates. So it depends very much on where you are
in the wage scale.
Mr. Ellison. Thank you.
I want to ask you a little about loans. What is your best
prescription or recommendation to fix what I would generally
describe as predatory loans? And I am not only referring to the
mortgage market, but what could also--some phenomena in the
credit card area? It sounds like what you are saying what we
need is more disclosure to the consumer. Did I understand your
views accurately on that?
Mr. Bernanke. Well, I indicated that it is very difficult.
And I am not just trying to hedge here, because we want to
eliminate predatory and abusive lending, but we don't want to
shut down the legitimate subprime market. And that is sometimes
a difficult task, and that is why I was praising some of the
State efforts that represent good experiments along those
lines.
So approaching that I think involves disclosure, it may
involve barring certain practices as well. The Federal Reserve,
I should say, is very much involved in trying to control
predatory lending. We are responsible for the Home Mortgage
Disclosure Act. We recently added information requirements
there on pricing so we can find out whether pricing is varying
across, for example, minorities and nonminorities. We are
responsible for the Home Ownership Equity Protection Act and
other things, Regulation Z. So we are very much involved in
that from the Federal level.
But again, I think there is still a lot of creativity we
can see at the State level to try to understand better how to
address this problem.
Mr. Ellison. Thank you, Mr. Chairman. I only have 5
minutes. So is the proposal--the rule proposal regarding
regulation Part D, is that basically a rule--do you anticipate
that rule focusing on disclosure, or will it include barring
certain practices?
Mr. Bernanke. Did you say Regulation Z?
Mr. Ellison. Yes.
Mr. Bernanke. Yes. That is part of the Truth in Lending
Act. By nature of the act, it is focused on disclosures, and it
will be focused on short-term credit like credit cards.
Mr. Ellison. Do you have any views on things like universal
default? This is a credit card practice I am sure you are
familiar with. If you default, if you are late on one credit
card, a credit card company you are not late on can jack up
your rate. Do you have any views on that practice and how
Congress might approach that kind of phenomena?
Mr. Bernanke. That is a difficult one. We don't want to
rule out the possibility that when someone's creditworthiness
drops for a variety of reasons, that their creditors get that
information and use it.
However, I think some of the concern about universal
default provisions is that people don't get enough warning or
notice that this condition is going to kick in. So that might
be one direction to go, which is to increase the amount of
warning that consumers get when their credit histories
deteriorate and when that may affect their pricing and their
credit cards.
Mr. Ellison. Thank you.
The Chairman. The gentleman from Illinois.
Mr. Roskam. Thank you, Mr. Chairman.
Mr. Chairman, I am a new Member of Congress and a new
member of the committee, and I appreciate the detailed
questions that my colleagues have asked. I guess I would ask a
broader question, and that is, you know, it seems to me that
economic strength and weakness, success and failure is
mysterious in a lot of ways, and it is difficult for somebody
outside of this arena to gaze in and really discern all the
factors that go into a good, successful mix. And I realize
there is really nobody who can do that.
But for purposes of this committee and future committees
that have this responsibility of oversight for you, Mr.
Chairman, and the Fed, what are the things that you are
responsible for? What are the tools that you have at your
disposal? And can you sort of, and maybe in an Econ 101 sort of
fashion, in the remaining 4 minutes just break that down and
say, look, maybe start--these are the things that we frankly
have no influence over, that are just off the table. I think
that would help me and maybe some other members of the
committee in the future.
Mr. Bernanke. Well, the Federal Reserve has multiple
responsibilities. The one that is best known is our
responsibility for monetary policy, which we use to pursue the
Congressional mandate of price stability and maximum
sustainable employment.
It is important that the Federal Reserve be independent and
be able to make independent decisions about interest rates in
order to preserve the credibility of the central bank. However,
it is also important that Congress exert oversight over the
Federal Reserve to make sure that we are following our stated
mission, and that we are pursuing coherent and rational plans.
The other areas include banking supervision, where we are
involved in developing the new capital accord, providing
various guidances and regulations together with the other
banking agencies, and there we are more like the other agencies
in terms of the kinds of responsibilities we have.
We have considerable responsibility in the consumer
protection area--that has come up a lot today--for various
regulations that provide disclosures to consumers on credit
cards, on mortgages, and that provide some tools to address
predatory lending, or high-cost lending. And there, like other
agencies, we are given instruction by the Congress, by the law,
in terms of what the Congress wants us to achieve and with what
instruments. And then it is our job to implement the
regulations that will most effectively accomplish Congress's
goals.
So we have a range of activities, all of which fall into
the underside of Congress obviously.
The Chairman. I thank the gentleman. The Chair will now
exercise his prerogative. We have four Members left who haven't
asked questions. We have about a half hour. That is going to be
the end of it. So I will go to the gentleman from Colorado, the
gentleman from Ohio, the gentleman from Indiana, and the
gentlewoman from Wisconsin. Anyone who is within the sound of
my voice or whose staff is here, don't bother to show up
because we are going to end it at this. And the gentleman of
Ohio is recognized--I am sorry the gentleman from Colorado.
Mr. Perlmutter. Thank you, Mr. Chairman, and Chairman
Bernanke, thank you for your stamina and patience. I have
several questions.
The Chairman. What about mine?
Mr. Perlmutter. Well, yours has been remarkable, Mr.
Chairman. Thank you.
On page 2 of your report, you say that consumer spending
continues to be the mainstay of the current economic expansion.
Where are we on consumer debt? I mean, have you seen a trend in
that, and can you tell me where we are?
Mr. Bernanke. Consumer debt has risen quite a bit. It is
rising more slowly recently mostly because home mortgages
aren't rising as quickly due to the flattening out of prices
and the slower amount of home purchase.
Generally speaking, though, as we said in the testimony,
households are in reasonable financial shape. Offsetting their
debt is an increase in wealth; the stock market is up. House
prices over the last few years have gone up a lot, and so many
people have a considerable amount of equity in their home. And
moreover, the strength of the labor market means that the job
availability, incomes, wages are also pretty strong. So for the
larger part of the population, finances seem reasonably good
relative to historical norms.
Now, of course, there are always some people who are having
problems, and as I noted in testimony, there are some sectors,
notably the subprime lending sector, where we were seeing some
distress, and we are watching that very carefully.
Mr. Perlmutter. So no alarm bells in the trend of consumer
debt, because I guess my perception has been that we have had
significant increase to consumer debt really as compared to
over the last 10 years, and that there have been some concerns
about that.
Mr. Bernanke. There have been increases in consumer debt.
There have been even larger increases in consumer assets, and
so our wealth has grown. Our wealth is now at the highest level
ever.
So, again, for most people there is a reasonable balance
between assets and liabilities.
Again, there are some pockets of concern, but I don't think
that at this point that they have significant implications for
the behavior of the overall economy, although we obviously have
to watch the individual sectors.
Mr. Perlmutter. Okay. Any exact pro or con by the recent
changes in the Bankruptcy Code now that we have had a year,
year-and-a-half under our belts? And, you know, if you don't,
if it is too early to tell, then that is fine, too.
Mr. Bernanke. It is a bit early to tell. We saw a big spike
in bankruptcy filings in advance of the law because people, if
they were thinking of going bankrupt, they wanted to get that
done before the law change. Since then we have seen a moderate
rate of bankruptcy, I think somewhat lower than in the past,
but whether that is due to the change in the law or just to
generally good financial conditions in the last few years is
hard to say. Again, we have seen, for example, very few
delinquencies in consumer credit or in mortgages outside the
subprime market, so there has been a generally good credit
situation in the last couple of years, and that seems to be
reflected in a relatively low rate of bankruptcies.
Mr. Perlmutter. Speaking of the subprime market, last week
the bottom kind of fell out of that market, or there was a
tremendous drop in that market. Has that leveled off? I haven't
read anything since Friday, but it seems there was a tremendous
loss of value in that market.
Mr. Bernanke. There have been a few small companies that
have gone out of business, and others that have lost money.
Nowadays, mortgages are not just made and held by individual
firms, they are then securitized and sold into the general
financial markets. And so we can look at financial market
prices and see what the market more broadly thinks is happening
in this area. And the value of subprime-mortgage-backed
securities has dropped pretty significantly, suggesting that
financial market investors are concerned about the loss
probabilities in this area.
Mr. Perlmutter. My last question, I had a number of
organizations, interest groups, approach me on the issue of
banks getting into the real estate business as opposed to
remaining in the lending business. Does the Fed have an opinion
on that, or do you have an opinion on that?
Mr. Bernanke. The Federal Reserve is charged, along with
the Treasury, in determining whether allowing banks to enter
the real estate brokerage business is consistent with Gramm-
Leach-Bliley. However, the Congress every year has essentially
forbidden that consideration, so we have not yet had an
opportunity to consider whether, based on the law, that should
be allowed, so we have not had the opportunity to try to
evaluate that.
Mr. Perlmutter. Do you have an opinion on it, or if the
answer is no, it is premature, that is fine.
Mr. Bernanke. Since I am charged with making a
determination, it would certainly be inappropriate for me to
speak about it until such time as I have a chance to look at
the information and data.
The Chairman. The gentleman from Ohio.
Mr. Gillmor. Thank you, Mr. Chairman, and also thank you,
Mr. Chairman, for spending so much time with us.
I want to touch on the question of ILC's. As you know, a
lot of retail firms are trying to make an end run around the
banking laws. Chairman Frank and I have had legislation in now
for three Congresses. In the past you have always--also your
predecessor, Mr. Greenspan, made comments in favor of closing
that loophole. Would that still be your opinion?
Mr. Bernanke. Yes, it would.
Mr. Gillmor. Let me ask you another question regarding the
economy, which has been generally good by all historical
standards and when you have a good economy for a long time, you
have low interest rates, thank goodness. We are all happy to
see that. You see some of the economic commentators talking
about whether it is time for the Fed to take the punch bowl
away, and I guess my question is while the party is still going
good economically, do you think we are still sober enough to
leave the punch bowl there? So my question is what are you
going to do with the punch bowl?
Mr. Bernanke. We are going to conduct monetary policy so as
to satisfy the chairman and meet our congressionally mandated
responsibility for maximum employment and price stability.
Mr. Gillmor. Thank you.
One other question, and I don't know if you are familiar
with this recent report, but many of us are worried about
America's global competitiveness, and the World Economic Forum
recently released its Global Competitiveness Report in which
the United States dropped from first to sixth.
I guess my question is, do you agree with that assessment
and the recommendations made therein?
Mr. Bernanke. First, I think that notion of competitiveness
between countries is a little bit deceiving. It is not quite
the same as GM and Ford. Any country that is successful in
increasing its productivity will increase its wages and living
standards independent of whether other countries are doing the
same.
I have looked at that report. It seems to me that the
change in ranking is based on relatively small changes in the
numbers. Some macroeconomic factors like our savings rate have
entered into that calculation. So I don't take that in
particular as an alarm bell. I don't think it is particularly
significant, but, as always, we need to find ways to improve
our macropolicies, improve our regulatory policies, and keep
the country as productive and efficient as possible.
Mr. Gillmor. Thank you very much, Mr. Chairman, and thanks
again for spending so much time with us.
Mr. Bernanke. Thank you.
The Chairman. And thanks to the gentleman from Ohio for
dropping in.
Mr. Gillmor. I was on the Floor, Mr. Chairman.
The Chairman. The gentleman from Indiana.
Mr. Donnelly. Thank you, Mr. Chairman.
Thank you, Chairman Bernanke.
My district has Chrysler plants, Delphi plants, and small
manufacturers, the heartland of this country, and in your
testimony you talked about painful changes that are taking
place. What the people of my district have asked me to tell you
is that the changes are even more painful when the competition
isn't fair. And we see China manipulating their currency,
having no labor standards, no environmental standards, and
intellectual piracy. And I guess my question to you, Mr.
Chairman is do you see this as unfair competition, and if so,
why do we let this continue?
Mr. Bernanke. Well, I have spoken about the yuan, about the
Chinese currency, and I think that it is undervalued. And I
think that the Chinese ought to allow it to be more market-
determined, that they should move in that direction.
I also think that we should continue to work with them to
enforce their intellectual property rights and to make sure
that both sides are living up to trade agreements.
So going forward, I agree that trade agreements need to be
enforced, and intellectual property rights are important, and
we should continue to apply pressure to China on those issues.
Mr. Donnelly. I appreciate that. There is a feeling back
home and on my part that the Chinese don't take us seriously in
that respect--that we talk and we talk and we talk, and while
we talk, more jobs leave my district from manufacturers who
have shaved every corner they can, who have put in all the
computer integration they can, and they see product coming into
this country at costs they can't even touch to manufacture.
And so there is a feeling that you are the home team, our
Treasury Secretary, he is the home team. He was over in China
recently, and there is a dispiritedness both on Republicans and
Democrats, this is bipartisan, that the home team has walked
away. Our own coaches have left us on the field all by
ourselves. And so when I go back and say, well, they are
talking, my manufacturers laugh and say, well, they will talk
us until our doors are closed. So what do I tell them about
that, Mr. Chairman?
Mr. Bernanke. The Chinese have recognized that the large
trade surplus is, in fact, a problem for them as well, and they
understand that there is a risk of reaction, protectionism
perhaps, and they have made it part of their official economic
plan to try to reduce the trade surplus that they currently
have.
Greater exchange rate flexibility is part of the way to do
that, but in addition, the Chinese are currently trying to
increase the reliance of their economy on domestic consumption,
domestic spending, and reduce reliance on exports. If they can
make that adjustment towards a domestically driven economy,
reduce their export reliance, that will help more, I think,
even than some other measures to create a better global
balance. So that is one step that they are taking.
I would also say in terms of our conversations in
discussions with the Chinese that I think that while the
exchange rate is a very, very important issue, there is a wide
range of issues that we as Americans have to discuss with the
Chinese including issues of trade; you mentioned intellectual
property rights and trade agreements, but things like the
environment. For example, I think there is a lot of mutual
benefit if, for example, we were able to provide equipment and
technology to the Chinese to help them clean up their air, that
would be beneficial to both parties. Similarly energy security
is another interest we have in common.
So another way to look at this is that, yes, we have to
keep working on the exchange rate, but we also have a lot of
other things that we need to be talking about, and I think it
is important to keep that conversation going.
Mr. Donnelly. And I guess I would ask you to discuss with
the Chinese when you talk to them, and the Secretary of
Treasury when he talks to them, that the folks back home who
are running these shops, who are supplying families with the
money to purchase their home, and we have increasingly high
foreclosures back home, have said to me, Joe, we sent you there
to do something about this, and if the Treasury Secretary and
the Fed and the President aren't willing to do it, then we are
looking to Congress to step up and take the steps necessary to
make this a fair ballgame, again because they feel it is a
rigged game, and our team won't step up for the people at home.
Thank you very much, Mr. Chairman.
The Chairman. The gentlewoman from Wisconsin.
Ms. Moore of Wisconsin. Well, thank you very much, Mr.
Chairman, and thank you very much, Mr. Chairman, for your
patience here today.
Thank you, Mr. Chairman. I did have an opportunity to
review your testimony before the committee, and I do want to
thank you. I have a reached some conclusions, which I guess I
want to sort of vet with you.
As others have mentioned, you mention several times in your
testimony that consumer spending continues to be the mainstay
in the current economic expansion, and you also seem to
indicate that the resilience of this consumer spending is
important towards sustaining our economic growth.
You also indicate that increase in people's compensation
accounts for this, and that our higher labor productivity and
perhaps a narrowing of corporate profits might offset the
higher labor productivity and that narrowing--I am sorry--
profit margins of companies might prevent higher prices from
occurring, and people might experience a real higher
compensation.
A couple of questions come to mind when I review this
testimony. First of all, I guess I want to ask you if you
account for this stronger gain in personal income as many of us
do, foresee that it is all aggregated kind of at the top, that
this increase in consumer spending is a very narrow number of
consumers, and that imposes some kind of risk unless we spread
the purchasing and consumer spending power a little bit
broader.
And secondly, leading into that sort of executive
compensation, if we were to--again, if we are depending--if our
economy is depending on consumer spending, wouldn't it be
better if we sort of spread the wealth a little bit and, in
keeping with your testimony, resist raising prices by narrowing
corporate prices, profits?
Mr. Bernanke. Well, as I discussed, there has been a long-
term trend toward increased inequality in the United States
that has been going on for a long time, but it is certainly an
issue. I think most recently there has been some improvement
just in terms of general earnings in the broader economy. I
mentioned the statistic of the average hourly earnings which
are for production workers, so that does not exclude the top 20
percent of wage earners, and that has grown recently at a
pretty reasonable pace. So I think that real wage gains
currently are going to help support consumption spending. But I
agree that we want to see a broad-based consumption in order to
make this sustainable.
Ms. Moore of Wisconsin. I am glad that you mentioned,
because there seems to be a lot of resistance toward things
like raising the minimum wage. I think we talk a lot about
minimum-wage workers, but there are people who don't make the
minimum wage that could benefit and would spend if they had
more so-called disposable income. And I think your testimony
really contributes a great deal to the discussion of how
important it is to support our economy through elevating
people's wages, and that is what I took away from your
testimony. Thank you.
Mr. Bernanke. Thank you.
Ms. Moore of Wisconsin. I yield back, Mr. Chairman.
The Chairman. I thank the gentlewoman, and I want to thank
the Chairman, and I want to say that I thank the members of the
committee. This has been a very thoughtful discussion. I
appreciate the Chairman. I think these are issues that we will
continue to talk about. And the hearing is adjourned.
[Whereupon, at 1:50 p.m., the hearing was adjourned.]
A P P E N D I X
February 15, 2007
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